REDWOOD MORTGAGE INVESTORS VII
                       (a California Limited Partnership)
                               Index to Form 10-K

                                December 31, 2003


<TABLE>
<S>      <C>                                                                                                 <C>
                                                 Part I
                                                                                                             Page No.
                                                                                                           -----------
Item 1   - Business                                                                                           3
Item 2   - Properties                                                                                         6
Item 3   - Legal Proceedings                                                                                  6
Item 4   - Submission of Matters to a Vote of Security Holders (Partners)                                     7

                                                  Part II

Item 5   - Market for the Registrant's "Limited Partnership Units" and Related Unitholder Matters             7
Item 6   - Selected Financial Data                                                                            7
Item 7   - Management's Discussion and Analysis of Financial Condition and Results of Operations              9
Item 7a - Quantitative and Qualitative Disclosures About Market Risk                                          15
Item 8   - Financial Statements and Supplementary Data                                                        18
Item 9   - Changes in and Disagreements with Accountants on Accounting and Financial Disclosure               40
Item 9a - Controls and Procedures                                                                             40

                                                  Part III

Item 10 - Directors and Executive Officers of the Registrant                                                  40
Item 11 - Executive Compensation                                                                              41
Item 12 - Security Ownership of Certain Beneficial Owners and Management                                      42
Item 13 - Certain Relationships and Related Transactions                                                      42
Item 14 - Principal Accountant Fees and Services                                                              42

                                                  Part IV

Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K                               43

Signatures                                                                                                    44

Certifications                                                                                                45
</TABLE>


                                       1
<PAGE>


                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549
                                    Form 10-K
                Annual Report Pursuant to Section 13 or 15 (d) of
                       the Securities Exchange Act of 1934

      For the year ended December 31, 2003 Commission file number 33-30427
-----------------------------------------------------------------------------

                         REDWOOD MORTGAGE INVESTORS VII
             (Exact name of registrant as specified in its charter)

         California                                      94-3094928
-----------------------------------------------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification)
incorporation or organization)

900 Veterans Blvd., Suite 500, Redwood City, CA            94063
-----------------------------------------------------------------------------
(address of principal executive offices)                (zip code)

Registrant's telephone number including area code     (650) 365-5341
-----------------------------------------------------------------------------

Securities registered pursuant to Section 12(b) of the Act:

     Title of each class            Name of each exchange on which registered
-----------------------------------------------------------------------------
          None                                          None
-----------------------------------------------------------------------------

     Securities  registered  pursuant  to  Section  12(g)  of the  Act:  Limited
Partnership Units

     Indicate by check mark whether the  registrant (1) has filed all reports to
be filed by  Section  13 or 15 (d) of the  Securities  Exchange  Act of 1934 the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days.

  YES           XXXX                                NO
-------------------------                         ---------------------------

     Through  December  31, 2003,  the limited  partnership  Units  purchased by
non-affiliates  was 119,983.59 Units computed at $100.00 a Unit for $11,998,359.
The offering was closed on September 30, 1992.

Documents incorporated by reference:

     Portions of the Prospectus  dated October 20, 1989, and Supplement #5 dated
February 14, 1992,  filed on form S-11, are  incorporated  in Parts II, III, and
IV.  Exhibits filed as part of Form S-11  Registration  Statement  #33-30427 are
incorporated in part IV.


                                       2
<PAGE>

                                     Part I


Item 1 - Business

     Redwood  Mortgage  Investors  VII, a California  limited  partnership  (the
"Partnership"),  was  organized  in 1989 of which  Michael R.  Burwell and Gymno
Corporation, a California corporation,  are the general partners. The address of
the  Partnership  and the general  partners is 900  Veterans  Blvd.,  Suite 500,
Redwood  City,  California  94063.  The  Partnership  is  organized to engage in
business as a mortgage  lender,  for the primary purpose of making loans secured
by deeds of trust on California real estate.  Loans are arranged and serviced by
Redwood Mortgage Corp., an affiliate of the general partners.  The Partnership's
objectives  are to make  investments,  as  referred to above,  which  will:  (i)
provide the maximum  possible cash returns  which limited  partners may elect to
(a)  receive as monthly,  quarterly  or annual  cash  distributions  or (b) have
credited to their capital  accounts and applied to Partnership  activities;  and
(ii) preserve and protect the Partnership's  capital. The Partnership's  general
business  is  more  fully  described  under  the  section  entitled  "Investment
Objectives and Criteria" pages 26-31 of the Prospectus, which is incorporated by
reference.

     Originally,  60,000 Units were offered on a "best  efforts"  basis  through
broker/dealer member firms of the National Association of Security Dealers, Inc.
In accordance with the terms of the Prospectus,  the general partners  increased
the number of Units for sale from 60,000 to 120,000 and elected to continue  the
offering until  September 30, 1992.  The offering  closed on September 30, 1992,
and the limited partners  contributed capital totaled $11,998,359 of an approved
$12,000,000  issue,  in Units of $100 each. At that date all the  applicants had
been admitted into the Partnership with none left in the applicant  status.  The
final SR report  (Report of Sales of Securities  and use of proceeds  therefrom)
was filed on September 21, 1992.

     The Partnership  began selling Units in October 1989 and began investing in
mortgages in December 1989. At December 31, 2003, the  Partnership had a balance
in its secured loan portfolio  totaling  $8,280,826  with interest rates thereon
ranging from 6.125% to 11.50%.

     Currently, loans secured by First Trust Deeds comprise 45.09% of the amount
of funds in the secured loan portfolio  followed by Second Trust Deeds of 46.76%
and Third Trust Deeds of 8.15%.  Owner-occupied  homes  combined with  non-owner
occupied homes total 29.50% of the secured loans.  Commercial loans  origination
decreased  from last year,  now comprising  53.99% of the secured  portfolio,  a
decrease of 9.88%.  Loans to  apartments  totaled  16.51%.  Of the total secured
loans,  72.24% are in five  counties of the Bay Area.  The County of  Stanislaus
makes up 24.12% of the loans. Stanislaus County is an adjacent county to the San
Francisco  Bay Area,  located  approximately  65 miles from San  Francisco.  The
balance of loans is primarily in Northern  California.  Loan size  increased the
past year, and is now averaging $360,036 per loan, an increase of $103,077. Some
of the larger loans invested in by the  Partnership are  fractionalized  between
other  affiliated   partnerships  with  objectives   similar  to  those  of  the
Partnership to further reduce risk.  Average equity per loan transaction,  which
is our loan plus any senior loans,  divided by the property's  appraised  value,
subtracted from 100%,  stood at 39.21%. A 40% equity average on loan origination
is generally considered very conservative.  Generally, the more equity, the more
protection for the lender. The Partnership's loan portfolio is in good condition
with no properties in foreclosure as of December 2003.

     Delinquencies  are discussed  under Item 7 -  Management's  Discussion  and
Analysis of Financial Condition and Results of Operations.

     For the year ended December 31, 2003 the  Partnership did not take back any
collateral  from  defaulted  borrowers.  During the year 2002,  the  Partnership
acquired one piece of real estate  property  through  foreclosure.  To assist in
protecting its own assets and reduce  liability,  the  Partnership  subsequently
transferred  the  property  to a newly  formed  LLC,  Stockton  Street  Property
Company,  LLC. The  Partnership  owned a minority  interest of 34% together with
another partnership, an affiliate of the general partners, the other investor in
the foreclosed loan, who owned the majority  interest of 66% and participated in
the original loan.  Assets of this LLC were sold during 2003 and the Partnership
incurred a loss of  approximately  $42,000.  The LLC will be dissolved  when its
final tax return  for year 2003 is filed.  The LLC is  further  discussed  under
Notes to Financial Statements (Note 6).

                                       3
<PAGE>

     The Partnership took back two additional  properties in prior years. One is
a commercial  property  currently in contract for sale,  which is anticipated to
take place in late 2004. The Partnership  anticipates that upon the sale of this
property we will sustain a loss of approximately $630,000, which the Partnership
previously set aside as reserves for real estate owned. The second property is a
parcel of land,  which the  Partnership is in the process of negotiating a sales
contract  on.  The  general   partners   believe  that  the  property  is  worth
considerably more than its carrying value.

Competition and General Economic Conditions

     The Partnership's  major competitors in providing mortgage loans are banks,
savings and loan associates,  thrifts,  conduit lenders,  mortgage brokers,  and
other entities both larger and smaller than the Partnership.  The Partnership is
competitive  in large part  because the general  partners  generate all of their
loans.  The general partners have been in the business of making or investing in
mortgage  loans in Northern  California  since 1978 and have developed a quality
reputation and recognition within the field.

     Mortgage  interest rates have fallen during the last 24 to 36 months.  This
has been  partially  due to actions by the  Federal  Reserve  Bank to reduce the
discount rate on borrowings  charged to member banks, a sluggish economy and low
rates of inflation. Although the general trend for interest rates has been down,
many lenders have tightened  their credit and reduced their lending  exposure in
various  markets and  property  types.  This credit  tightening  from  competing
lenders  would  generally  provide  the  Partnership  with  additional   lending
opportunities at attractive interest rates.  However, as a result of the slowing
economy,  there are now  fewer  transactions  in the  marketplace,  which  could
potentially  reduce  the  number of lending  opportunities  to the  Partnership.
Continued  rate  reductions  by the Federal  Reserve  Bank, a continued  slowing
economy,  and a  continued  low  threat of  inflation  could  have the effect of
reducing  mortgage  yields in the future.  Current  loans with  relatively  high
yields  could be  replaced  with loans with  lower  yields,  which in turn could
reduce the net yield paid to the limited partners. In addition, if there is less
demand by borrowers  for loans and,  thus,  fewer loans for the  Partnership  to
invest  in,  it  will  invest  its  excess  cash  in  shorter-term   alternative
investments yielding considerably less than the current investment portfolio.

Secured Loan Portfolio

     A summary of the  Partnership's  secured loan  portfolio as of December 31,
2003 is set forth below.

   Loans as a Percentage of Appraised Values
<TABLE>
<S><C>                                                                              <C>
   First Trust Deed Loans                                                           $ 3,733,346
   Appraised Value of Properties at Time of Loan                                      5,490,043
                                                                                  -------------
            Total First Trust Deeds as a % of Appraisal                                  68.00%
                                                                                  =============

   First Trust Deed Loans                                                           $ 3,733,346
   Second Trust Deed Loans                                                            3,872,480
   Third Trust Deed Loans                                                               675,000
                                                                                  -------------
                                                                                      8,280,826
   Priority positions due other Lenders at Time of Loan
       First Trust Deed Loans due other Lenders                                       4,063,952
       Second Trust Deed Loans due other Lenders                                        255,329
                                                                                  -------------

            Total Debt                                                              $12,600,107
                                                                                  =============

     Appraised Property Value at Time of Loan                                       $20,728,514
            Total Loans as a % of Appraisal based on appraisals and prior
               liens at date of loan                                                     60.79%
                                                                                  =============

   Number of Secured Loans Outstanding                                                       23

   Average Secured Loan                                                                 360,036
   Average Secured Loan as a % of Secured Loans Outstanding                               4.35%
   Largest Secured Loan Outstanding                                                   1,000,000
   Largest Secured Loan as a % of Secured Loans Outstanding                              12.08%
</TABLE>


                                       4
<PAGE>
<TABLE>
<S>                                                                                  <C>
   Secured Loans as a Percentage of Total Secured Loans                              Percent
   -------------------------------------------------------------------            -------------

   First Trust Deed Loans                                                                45.09%
   Second Trust Deed Loans                                                               46.76%
   Third Trust Deed Loans                                                                 8.15%
                                                                                  -------------
            Total Trust Deed Loan Percentage                                            100.00%
</TABLE>
<TABLE>
<S>                                                              <C>                 <C>

   Secured Loans by Type of Property                             Amount              Percent
   ------------------------------------------------          --------------       -------------

   Owner Occupied Homes                                         $   853,869              10.31%
   Non-Owner Occupied Homes                                       1,589,092              19.19%
   Apartments                                                     1,367,327              16.51%
   Commercial                                                     2,410,861              29.12%
   Land                                                           2,059,677              24.87%
                                                             --------------       -------------
            Total                                               $ 8,280,826             100.00%
                                                             ==============
</TABLE>

     The following is a distribution of secured loans outstanding as of December
31, 2003 by Counties.

                                                        Total
                  California County                 Secured Loans     Percent
   -------------------------------------------      -------------   -----------

   San Francisco Bay Area Counties
   Alameda                                            $ 3,652,963        44.11%
   San Francisco                                          853,142        10.30%
   Santa Clara                                            774,489         9.35%
   San Mateo                                              568,867         6.88%
   Contra Costa                                           132,568         1.60%
                                                    -------------   -----------
                                                        5,982,029        72.24%

   San Francisco Bay Area Adjacent Counties
   Stanislaus                                           1,997,161        24.12%

   Other California Counties
   Sacramento                                             224,164         2.70%
   Shasta                                                  77,472         0.94%
                                                    -------------   -----------

            Total                                     $ 8,280,826       100.00%
                                                    =============   ===========

     Statement  of  Condition  of  Secured  Loans:  Number of  Secured  Loans in
Foreclosure  0Scheduled  maturity  dates of  secured  loans as of  December  31,
2003are as follows:

                Year Ending December 31,                Amount
           -----------------------------------       ------------

                          2004                        $ 2,334,650
                          2005                          2,622,109
                          2006                            809,894
                          2007                          1,521,152
                          2008                            199,415
                       Thereafter                         793,606
                                                     ------------
                         Total                        $ 8,280,826
                                                     ============


                                       5
<PAGE>

     The  Partnership's  largest  loan in the  principal  amount  of  $1,000,000
represents 12.08% of outstanding secured loans and 10.77% of Partnership assets.
Larger  loans  sometimes  increase  above 10% of the secured  loan  portfolio or
Partnership assets as these amounts decrease due to limited partner  withdrawals
and loan payoffs.

     The   scheduled   maturities   for  2004  include   seven  loans   totaling
approximately  $2,207,200 past maturity at December 31, 2003.  Interest payments
on four of these past maturity loans  totaling  $1,985,357  were  categorized as
delinquent over 90 days. These three delinquent past maturity loans were made to
a developer who is selling the property. A portion of the property has a pending
sales  contract.  The Partnership  believes that there is adequate  security for
their indebtedness and that the sales effort is reasonable and adequate. Several
other past maturity borrowers were in process of refinancing their loans through
other  institutions,  as this was an  opportune  time for them to do so and take
advantage  of the lower  interest  rate.  The  Partnership  allows  borrowers to
occasionally  continue to make the payments on debt past maturity for periods of
time.  The  Partnership,  in most  instances,  receives  the benefit of a higher
interest rate than would  otherwise be available in the currently  existing loan
marketplace.

     Overall,  the loan portfolio had five loans with  principal  outstanding of
$2,259,756  where  interest  payments  were  overdue  in excess of 90 days.  The
principal  outstanding  represents 27.29% of the Partnership's secured portfolio
as of December 31, 2003.

     In addition,  one loan with principal outstanding of $96,716 was considered
impaired at December  31,  2003,  which means that  interest is no longer  being
accrued and that  payments  received  will be applied to reduce the  outstanding
loan  balances,  including  accrued  interest and  advances.  That is,  interest
accruals are no longer  recorded  thereon.  This  represents  1.17% of the total
secured loan portfolio.

Item  2 -  Properties

     The  Partnership  did not take back any collateral  from borrowers in 2003.
During 2002, the  Partnership  took back the  collateral  security on one of its
loans through  foreclosure.  This loan was originally  fractionalized  and owned
with another affiliated  Partnership.  In order to reduce potential  liabilities
the  Partnership  transferred  at its book value the real estate taken back to a
newly formed Limited  Liability Company called Stockton Street Property Company,
LLC. The real estate security was six condominium  units.  Management of the LLC
was through its  managing  member,  Michael  Burwell,  a general  partner of the
Partnership.  By the end of 2003 all the units were sold  resulting in a loss to
the Partnership of  approximately  $42,000.  It is anticipated  that in 2004 the
Stockton  Street  Property  Company,  LLC will be closed and its operations will
cease.

     The  Partnership  also  owns  (through  previous   foreclosure)  two  other
properties; a commercial property and an undeveloped parcel of land. The land is
located  in East  Palo  Alto.  The  land is  owned  with  two  other  affiliated
partnerships.  The Partnership's net investment in the land at December 31, 2003
is $62,703.  Currently the  Partnership  is in the process of negotiating a sale
with an interested  buyer. The  Partnership's  net investment of $62,703 is less
than 1% of Partnership assets. The general partners believe that the property is
worth considerably more than its net investment.

     The second  property  is a  commercial  property  located in Walnut  Creek,
California.  The property is currently pending sale. We anticipate that the sale
will occur in the last quarter of 2004.  Management  has set aside loss reserves
in the amount of  $630,169,  which they  believe are adequate in amount to cover
anticipated losses.


Item 3 - Legal  Proceedings

     In the normal  course of business the  Partnership  may become  involved in
various types of legal  proceedings  such as  assignments  of rents,  bankruptcy
proceedings,   appointments   of   receivers,   unlawful   detainers,   judicial
foreclosures, etc., to enforce the provisions of the deeds of trust, collect the
debt owed under the promissory notes or to protect or recoup its investment from
the real property  secured by the deeds. As of the date hereof,  the Partnership
is not  involved  in any  legal  proceedings  other  than  those  that  would be
considered part of the normal course of business.

                                       6
<PAGE>

Item 4 - Submission of Matters to a Vote of Security Holders (Partners)

     No matters have been submitted to a vote of the Partnership.

                                     Part II

Item 5 - Market for the Registrant's "Limited Partnership Units" and Related
Unitholder Matters

     120,000  Units  at $100  each  (minimum  20  Units)  were  offered  through
broker-dealer  member firms of the National Association of Securities Dealers on
a "best  efforts"  basis (as  indicated  in Part I item 1).  Investors  have the
option of  withdrawing  earnings  on a monthly,  quarterly,  or annual  basis or
reinvesting and compounding the earnings. Limited partners may withdraw from the
Partnership in accordance with the terms of the Partnership Agreement subject to
possible early  withdrawal  penalties.  There is no  established  public trading
market.

     A  description  of  the  Partnership  Units,   transfer   restrictions  and
withdrawal  provisions  is more  fully  described  under  the  section  entitled
"Description of Units" and "Summary of Limited Partnership Agreement",  pages 47
to 50 of the Prospectus, a part of the referenced Registration Statement,  which
is incorporated by reference.Item 6 - Selected  Financial  DataRedwood  Mortgage
Investors VII began operations in December 1989. Financial condition and results
of operation for the Partnership as of and for the five years ended December 31,
2003 were:

                                 Balance Sheets

                                     Assets
<TABLE>
<S>                                        <C>              <C>               <C>                <C>                <C>
                                                                        December 31,
                                      ---------------------------------------------------------------------------------------

                                           2003             2002              2001               2000               1999
                                      -------------     -------------    --------------     --------------     --------------

Cash and cash equivalents               $   321,114       $ 1,057,845      $    389,844       $    269,000       $    388,770

Loans
   Loans, secured by deeds of trust       8,280,826         6,423,984        10,091,195         12,794,297         11,011,660
   Loans, unsecured                         232,551           216,770        10,091,195         12,794,297            163,085
   Less allowance for loan losses         (680,469)         (791,882)         (887,578)          (850,548)          (828,563)

Interest and other receivables
   Accrued interest and late fees           489,995           304,936           666,189            363,321            357,177
   Advances on loans                          6,484            17,230            50,665             29,825             31,669

Real estate held for sale, net              633,053           683,136           872,133            816,094            307,931
Real estate owned in process                      -                 -                 -                  -            525,510
Investment in LLC                                 -         1,212,722                 -                  -                  -
                                      -------------     -------------    --------------     --------------     --------------
                                        $ 9,283,554       $ 9,124,741      $ 11,356,179       $ 13,610,410       $ 11,957,239
                                      =============     =============    ==============     ==============     ==============
</TABLE>


                                       7
<PAGE>

                        Liabilities and Partners' Capital
<TABLE>
<S>                                          <C>              <C>                <C>               <C>             <C>
                                                                           December 31,
                                         -----------------------------------------------------------------------------------

                                             2003             2002               2001              2000            1999
                                         ------------      ------------      -------------     -------------    ------------
Liabilities
  Line of credit                           $  200,000        $        -        $ 1,907,000       $ 3,500,000     $   800,000
  Accounts payable                              4,102             2,593             11,295             4,102          32,234

  Deferred interest                                 -            37,704              2,322                 -         115,709
  Payable to affiliate                         51,288            32,176              3,316                 -               -
                                         ------------      ------------      -------------     -------------    ------------
                                              255,390            72,473          1,923,933         3,504,102         947,943

Partners' capital
  General partners                             11,973            11,978             11,978            11,978          11,978
  Limited partners subject
      to redemption                         9,016,191         9,040,290          9,420,268        10,094,330      10,997,318
                                         ------------      ------------      -------------     -------------    ------------
Total partners' capital                     9,028,164         9,052,268          9,432,246        10,106,308      11,009,296
                                         ------------      ------------      -------------     -------------    ------------
                                           $9,283,554        $9,124,741        $11,356,179       $13,610,410     $11,957,239
                                         ============      ============      =============     =============    ============

                              Statements of Income

                                                                            December 31,
                                          ----------------------------------------------------------------------------------

                                              2003             2002              2001              2000            1999
                                         ------------      ------------      -------------     -------------    ------------

Gross revenue                              $  782,280       $ 1,078,186        $ 1,192,381       $ 1,437,964     $ 1,663,245
Expenses                                      189,639           314,704            371,184           537,818         753,664
                                         ------------      ------------      -------------     -------------    ------------

Net income                                 $  592,641       $   763,482        $   821,197       $   900,146     $   909,581
                                         ============      ============      =============     =============    ============

Net income to general partners (1%)             5,926             7,635              8,212             9,001           9,096
Net income to limited partners (99%)          586,715           755,847            812,985           891,145         900,485
                                         ------------      ------------      -------------     -------------    ------------
                                           $  592,641       $   763,482        $   821,197       $   900,146     $   909,581
                                         ============      ============      =============     =============    ============

Net income per $1,000 invested by
  limited partners for entire period:
     - where income is compounded
         and reinvested                    $      67        $        85        $        85       $        85     $        79
                                         ============      ============      =============     =============    ============

     - where partner receives income
         in monthly distributions          $      65        $        82        $        82       $        82     $        76
                                         ============      ============      =============     =============    ============
</TABLE>

     The annualized yield, when income is compounded and retained,  for 1999 was
7.86%,  for 2000 the annualized  yield was 8.52%,  for 2001 the annualized yield
was 8.50%,  for 2002 the annualized yield was 8.44%, and for 2003 the annualized
yield was 6.66%.  Average  annualized yield from inception  through December 31,
2003, when income is compounded and retained, was 7.81%.

     The  annualized  yield,  when income is distributed  monthly,  for 1999 was
7.59%,  for 2000 the annualized  yield was 8.21%,  for 2001 the annualized yield
was 8.19%,  for 2002 the annualized  yield was 8.13% and for 2003 the annualized
yield was 6.47%.  Average  annualized yield from inception  through December 31,
2003, when income is distributed monthly was 7.55%.


                                       8
<PAGE>

     Item 7 - Management  Discussion  and Analysis of  Financial  Condition  and
Results of Operations

     Management  Discussion  and Analysis of Financial  Condition and Results of
Operations

Critical Accounting Policies.

     In  preparing  the  financial  statements,  management  is required to make
estimates based on the information available that affect the reported amounts of
assets and  liabilities  as of the balance  sheet dates and income and  expenses
during  the  reporting  periods.   Such  estimates  relate  principally  to  the
determination of (1) the allowance for loan losses (i.e. the amount of allowance
established  against loans  receivable as an estimate of potential  loan losses)
including   the  accrued   interest  and  advances  that  are  estimated  to  be
unrecoverable  based on estimates of amounts to be collected  plus  estimates of
the value of the  property as  collateral  and (2) the  valuation of real estate
acquired through foreclosure.

     Loans and the related accrued interest, late fees and advances are analyzed
on a continuous  basis for  recoverability.  Delinquencies  are  identified  and
followed  as part of the loan  system.  A  provision  is made for loan losses to
adjust the allowance for loan losses to an amount considered by management to be
adequate,   with  due   consideration  to  collateral   value,  to  provide  for
unrecoverable  loans and  receivables,  including  impaired loans,  other loans,
accrued interest,  late fees and advances on loans and other accounts receivable
(unsecured).  The  Partnership  charges  off  uncollectible  loans  and  related
receivables  directly to the allowance  account once it is  determined  that the
full amount is not collectible.

     If the probable  ultimate  recovery of the carrying  amount of a loan, with
due  consideration  for the fair value of  collateral,  is less than amounts due
according to the  contractual  terms of the loan  agreement and the shortfall in
the amounts due are not  insignificant,  the carrying  amount of the  investment
shall be reduced to the  present  value of future cash flows  discounted  at the
loan's effective interest rate. If a loan is collateral dependent,  it is valued
at the estimated fair value of the related collateral.  If events and or changes
in  circumstances  cause  management  to have  serious  doubts about the further
collectibility  of the  contractual  payments,  a loan  may  be  categorized  as
impaired and interest is no longer accrued.  Any subsequent payments on impaired
loans are applied to reduce the  outstanding  loan  balances  including  accrued
interest and advances.

     Recent  trends in the  economy  have been taken into  consideration  in the
aforementioned  process of arriving at the  allowance  for loan  losses.  Actual
results could vary from the aforementioned provisions for losses.

Forward Looking Statements.

     Some of the  information  in the Form  10-K  may  contain  forward  looking
statements.  Uses of words  such as  "will",  "may",  "anticipate",  "estimate",
"continue"  or other forward  looking  words,  discuss  future  expectations  or
predictions.  The foregoing analysis of 2003 includes forward looking statements
and predictions  about the  possibility of future events,  results of operations
and  financial  condition.  As such,  this  analysis may prove to be  inaccurate
because of assumptions made by the general partners or the actual development of
the future  events.  No assurance  can be given that any of these  statements or
predictions will ultimately prove to be correct or substantially correct.

Related Parties.

     The general  partners of the Partnership are Gymno  Corporation and Michael
R. Burwell.  Most  Partnership  business is conducted  through Redwood  Mortgage
Corp.,  an  affiliate  of the general  partners,  which  arranges,  services and
maintains  the loan  portfolio  for the  benefit  of the  Partnership.  The fees
received by the  affiliate  to the  general  partners  are paid  pursuant to the
partnership agreement and are determined at the sole discretion of the affiliate
to the general partners.  In the past, the affiliate to the general partners has
elected not to take the maximum compensation. The following is a list of various
Partnership activities for which related parties are compensated.

                                       9
<PAGE>

     o Mortgage  Brokerage  Commissions  For fees in connection with the review,
selection,  evaluation,  negotiation and extension of loans, the Partnership may
collect an amount  equivalent  to 12% of the loaned  amount until 6 months after
the termination date of the offering. Thereafter, the loan brokerage commissions
(points) will be limited to an amount not to exceed 4% of the total  Partnership
assets per year. The loan brokerage  commissions are paid by the borrowers,  and
thus,  are not an expense of the  Partnership.  For the years ended December 31,
2001, 2002 and 2003 loan brokerage  commissions  paid by borrowers were $84,137,
$24,661 and $111,927, respectively.

     o Mortgage  Servicing Fees Monthly mortgage  servicing fees of up to 1/8 of
1% (1.5% on an annual basis) of the unpaid principal of the Partnership's  loans
is paid to Redwood  Mortgage  Corp.,  or such lesser amount as is reasonable and
customary in the  geographic  area where the  property  securing the mortgage is
located.  Mortgage servicing fees of $94,396, $163,531 and $73,062 were incurred
for the years ended December 31, 2001, 2002 and 2003, respectively.

     These  servicing  fees  were  charged  at 1%, on an  annual  basis,  of the
outstanding  principal balances.  If the maximum mortgage servicing fee of 1.5%,
on an annual basis, had been charged to the  Partnership,  then net income would
have been reduced by  approximately  $36,531.  Reducing  net income  reduces the
annualized  yields. An increase or decrease in this fee within the limits set by
the Partnership's agreement directly impacts the yield to the limited partners.

     o Asset  Management  Fees The general  partners  receive  monthly  fees for
managing the Partnership's portfolio and operations up to 1/32 of 1% of the `net
asset  value'  (3/8 of 1% on an annual  basis).  Management  fees to the general
partners of $37,233,  $34,869 and $34,011 were incurred by the  Partnership  for
the years ended December 31, 2001, 2002 and 2003, respectively.

     o Other Fees The partnership  agreement  provides that the general partners
may receive other fees such as  reconveyance,  mortgage  assumption and mortgage
extension  fees.  Such fees are  incurred by the  borrowers  and are paid to the
general partners.

     o Income and Losses  All  income  and  losses  are  credited  or charged to
partners in relation to their respective Partnership  interests.  The allocation
to the general partners (combined) shall be a total of 1%.

     o Operating  Expenses An affiliate  of the  Partnership,  Redwood  Mortgage
Corp.,  is reimbursed by the  Partnership  for all operating  expenses  actually
incurred  by it on  behalf of the  Partnership,  including  without  limitation,
out-of-pocket general and administration expenses of the Partnership, accounting
and audit fees,  legal fees and expenses,  postage and preparation of reports to
limited partners.

     o  Contributed   Capital  The  general   partners   jointly  and  severally
contributed 1/10 of 1% in cash contributions as proceeds from the offerings were
received from the limited partners.  As of December 31, 2003 and 2002, a general
partner,  Gymno  Corporation,  had contributed  $11,973 as capital in accordance
with Section 4.02(a) of the partnership agreement.

Results of Operations - For the three years ended December 31, 2001, 2002 and
2003.

     On September 30, 1992, the Partnership  had sold  119,983.59  Units and its
contributed  capital totaled  $11,998,359 of the approved  $12,000,000 issue, in
Units of $100 each.  As of that date,  the  offering  was  formally  closed.  At
December 31, 2003, Partners' Capital totaled $9,028,164.

     The net income  decrease of $78,949 (8.77%) for the year ended December 31,
2001 was due primarily to a decrease in interest earned on loans of $233,624,  a
decrease in late fees of $2,724,  and a decrease in other  income of $9,235,  an
increase in clerical costs of $11,281, and an increase in professional  services
of $1,800;  offset by decreases in mortgage servicing fees of $16,317,  interest
on line of credit of $129,416,  asset  management fees of $1,167,  provision for
losses on loans and real estate of $28,293 and other expenses of $4,522.

                                       10
<PAGE>

     The net income  decrease of $57,715 (7.03%) for the year ended December 31,
2002 was due primarily to decreases in interest on loans of $134,757;  offset by
decreases in various expenses;  interest on line of credit of $73,500,  clerical
costs of $7,741, asset management fees of $2,364,  provision for losses on loans
and real  estate of  $57,410  and other  expenses  of $890.  Net income was also
affected by increases in late fees of $16,425 and other income of $4,137; offset
by expense  increases  in mortgage  servicing  fees of $69,135 and  professional
services of $16,290.

     Net income  decrease of $170,841  (22.38%) for the year ended  December 31,
2003 was due primarily to decreases in interest income of $289,092, late fees of
$867 and other  income  of  $5,947;  offset by  expense  decreases  in  mortgage
servicing  fees of $90,469,  interest on line of credit of $45,752 and  clerical
costs of $7,558.  There were also increases in  professional  services of $3,594
and other expenses of $14,238.

     The decline in interest  revenues from  $1,172,474 in 2001 to $1,037,717 in
2002 and to  $748,625 in 2003 is  primarily  attributable  to the lower  average
secured loan portfolio  balance from $10,478,000 to $9,138,000 to $7,266,000 for
the years  2001,  2002 and 2003,  respectively,  and the  effects  of  declining
interest rates.  The declining  average loan balance in 2002 was due to the take
back of  collateral on one loan with a principal  balance of $954,000,  and less
credit line usage  coupled with  significant  loan payoffs in the last months of
2002. The reduced average loan balance in 2003 was due to low  outstanding  loan
balances in early 2003 while the Partnership  sought replacement loans for those
paid off in late 2002.  Overall in 2003 the  outstanding  secured  loan  balance
increased  from  $6,424,000 to  $8,281,000  from January 1, 2003 to December 31,
2003.

     Late fee income was  $8,495 in 2001,  $24,920 in 2002 and  $24,053 in 2003.
The increase in 2002 and 2003 mainly  involves  collection  of  additional  late
charges in excess of amounts recorded when some larger loans paid-off.

     The fluctuation in other income from $11,412 in 2001 to $15,549 in 2002 and
to $9,602 in 2003 was mainly because of  fluctuations in transfer fees received,
and in early  withdrawal  penalties  gained and  reduction  in interest on money
market  deposits.  Included in other income during 2002 was  collection of early
withdrawal penalties of $11,619, compared to $3,756 for year 2001 and $1,815 for
year 2003.

     Mortgage servicing fees were $94,396 in 2001,  $163,531 in 2002 and $73,062
in 2003. The increase in 2002 is primarily  attributable to additional servicing
fees earned related to impaired loans. The Partnership does not accrue servicing
fees to Redwood  Mortgage  Corp. on impaired  loans.  Rather,  servicing fees on
impaired  loans are  incurred as borrower  payments are  received.  Reduction in
mortgage  servicing fees overall is also attributed to the overall  reduction in
the average mortgage loan portfolio size from $10,478,000 in 2001, to $9,138,000
for 2002 and to $7,266,000 in 2003.  These servicing fees were charged at 1%, on
an annual basis, of the outstanding  principal balances. If the maximum mortgage
servicing fee of 1.5%, on an annual basis,  had been charged to the Partnership,
then net income would have been reduced by approximately  $36,531.  Reducing net
income reduces annualized yields. An increase or decrease in this fee within the
limits set by the  Partnership's  agreement  directly  impacts  the yield to the
limited partners.

     Reduction  in interest  expense on bank line of credit is because of lesser
utilization of the credit facility in 2002 and 2003. The  Partnership  used loan
pay-off  proceeds  received to pay down the line of credit to $0 at December 31,
2002,  and to a balance of  $200,000 at December  31,  2003.  The line of credit
balance was $1,907,000 at December 31, 2001

     Decrease in asset  management  fees from $37,233 in 2001 to $34,869 in 2002
and to $34,011 in 2003 was due to a decrease in limited  partners' capital under
management  due to partner  withdrawals  offset by the earnings  retained in the
Partnership  by  investors  who  choose  to  compound  their  earnings.  Limited
partners'  capital  balances were  $9,420,268,  $9,040,290  and  $9,016,191,  at
December 31, 2001, 2002 and 2003, respectively.

     Increase in  professional  fees from $23,868 in 2001 to $40,158 in 2002 and
to $43,752 in 2003 was due to increased  costs of services  provided in relation
to audit and tax return processing.

     No  provision  for  losses on loans  was  required  in 2003 as the  general
partners felt the allowance for loan losses of $680,469 as of December 31, 2003,
was adequate to offset any  potential  loss in loans or real estate.  A negative
provision  of  ($20,039)  and  ($18,299)  in 2002 and 2003 was due to loan  loss
recoveries  during  these two years.  A provision of $37,371 was provided for in
2001.

                                       11
<PAGE>

     Decrease in clerical  costs from $38,313 in 2001, to $30,572 in 2002 and to
$23,014 in 2003, was due to a reduction in Partnership  size from  $9,432,246 in
2001,  to  $9,052,268  in  2002  and to  $9,028,164  in  2003.  The  decline  in
Partnership  capital  is due to  capital  and  earnings  withdrawals  by limited
partners.

     Other  expenses  decreased  from $11,779 in 2001,  to $10,889 in 2002,  but
increased to $25,127 in 2003. This substantial increase of $14,238 over the 2002
total was due to increased expenses of $13,980 on real estate held for sale.

     During  the year 2003 the  Partnership's  annualized  yield on  compounding
accounts was 6.66% and on monthly distributing accounts it was 6.47%.

     Beginning in 2001, the Federal Reserve reduced interest rates significantly
by cutting the Federal Funds Rate to 1.00%.  The effect of the previous cuts has
greatly  reduced  short-term  interest  rates  and to a  lesser  extent  reduced
long-term interest rates. The general partners anticipate that new loans will be
placed at rates  similar to those placed  during 2003.  The lowering of interest
rates has encouraged  those  borrowers that have mortgages with higher  interest
rates than those currently  available to seek refinancing of their  obligations.
The  Partnership may face  prepayments in the existing  portfolio from borrowers
taking  advantage  of these  lower  rates.  As  prepayments  occur,  the general
partners  expect to replace paid off loans with loans at somewhat lower interest
rates.  Loan demand from  qualified  borrowers is adequate to generally keep the
partners capital fully invested. At this time, the general partners believe that
the average loan  portfolio  interest  rate will  stabilize  over the year 2004.
Based  upon the  rates  payable  in  connection  with the  existing  loans,  and
anticipated  interest  rates to be charged by the  Partnership  and the  general
partners' experience,  the general partners anticipate that the annualized yield
will range between 6% and 7% in 2004.


Allowance for Losses.

     The general  partners  regularly  review the loan portfolio,  examining the
status of delinquencies,  the underlying  collateral  securing these properties,
the Real Estate Owned ("REO") expenses and sales  activities,  borrowers payment
records, etc. Data on the local real estate market and on the national and local
economy are studied.  Based upon this  information and other data, loss reserves
are increased or  decreased.  The  Partnership  is not a credit based lender and
hence  while it reviews  the credit  history  and  income of  borrowers,  and if
applicable,  the income from income producing  properties,  the general partners
expect that we will on occasion take back real estate security. During 2001, the
Northern  California  real  estate  market  slowed  and the  national  and local
economies  have slipped into  recession.  During 2002 and 2003,  the economy has
stabilized,  but is still stagnant.  Borrower  foreclosures,  as set forth under
Results of  Operations,  are a normal aspect of  Partnership  operations and the
general  partners  anticipate  that  they  will not have a  material  effect  on
liquidity. As of December 31, 2003, there were no properties in foreclosure. The
Partnership  enters into workout agreements with borrowers who are past maturity
or delinquent in their regular payments.  The Partnership had workout agreements
on two loans  totaling  $64,936 as of December  31, 2003.  Typically,  a workout
agreement allows the borrower to extend the maturity date of the balloon payment
and allows the borrower to make current  monthly  payments  while  deferring for
periods  of time,  past due  payments,  or allows  time to pay the loan in full.
These  workout  agreements  and  foreclosures  generally  exist  within our loan
portfolio to greater or lesser degrees, depending primarily on the health of the
economy.  The number of  foreclosures  and workout  agreements  will rise during
difficult times and conversely  fall during good economic times.  The number and
amount of workout  agreements  existing at December  31, 2003,  in  management's
opinion,  does not have a  material  effect  on our  results  of  operations  or
liquidity.  These  workouts  have been  considered  when  management  arrived at
appropriate  loan loss reserves and based on our  experience,  are reflective of
our loan marketplace segment.  Because of the number of variables involved,  the
magnitude of the possible swings and the general  partners  inability to control
many of these factors,  actual results may and do sometimes differ significantly
from  estimates  made by the  general  partners.  Management  provided  $37,371,
($20,039) and ($18,299), as provisions (recoveries) for losses on loans and real
estate for the years ended December 31, 2001, 2002 and 2003,  respectively.  The
provision  for  losses on loans and real  estate  was  decreased  by  $28,293 to
$37,371 in 2001, by $57,410 to ($20,039) in 2002.  The  Partnership  recorded an
additional  reduction of loan loss reserves of $18,299 in 2003.  These decreases
reflect reduced  expected loan and REO  anticipated  losses in the various years
and that current reserves for losses are adequate to handle potential losses. If
conditions  change,  the  Partnership may again increase its provisions for loan
losses.

                                       12
<PAGE>

     The  Partnership  may  restructure  loans.  This is done either through the
modification  of  an  existing  loan  or  by  rewriting  a  whole  new  loan.  A
modification  could involve,  among other  conditions,  an extension in maturity
date, a reduction in repayment amount, a change in interest rate, or granting of
additional loan funds.

     During 2003 the Partnership  restructured  two loans into one existing loan
with a lower interest rate. This resulted in an increase to loans  receivable of
$107,198  and a  decrease  to accrued  interest  and late fees and  advances  of
$88,685 and $18,513, respectively. During 2002 the Partnership restructured four
loans  into two new  loans  with a lower  interest  rate.  This  resulted  in an
increase to loans  receivable  and the allowance for loan losses of $420,969 and
$47,489,  respectively,  and a decrease  to accrued  interest  and  advances  of
$345,796 and $27,684, respectively.


Borrower Liquidity and Capital Resources.

     The partnership  relies upon loan payoffs,  borrowers'  mortgage  payments,
and, to a lesser  degree,  its line of credit for the source of funds for loans.
Recently,  mortgage interest rates have decreased  somewhat from those available
at the  inception  of the  partnership.  If  interest  rates  were  to  increase
substantially,  the yield of the  partnership's  loans may provide  lower yields
than  other  comparable  debt-related  investments.   Additionally,   since  the
partnership has made primarily fixed rate loans, if interest rates were to rise,
the likely result would be a slower  prepayment rate for the  partnership.  This
could cause a lower  degree of liquidity as well as a slowdown in the ability of
the  partnership  to  invest  in  loans  at the  then  current  interest  rates.
Conversely,  in the event interest rates were to decline,  the partnership could
see significant borrower prepayments,  which, if the partnership can only obtain
the  then  existing  lower  rates  of  interest  may  cause  a  dilution  of the
partnership's yield on loans,  thereby lowering the partnership's  overall yield
to the limited partners. The partnership to a lesser degree relies upon its line
of credit to fund  loans.  Generally,  the  partnership's  loans are fixed rate,
whereas the credit line is a variable  rate loan.  In the event of a significant
increase in overall  interest  rates,  the credit  line rate of  interest  could
increase to a rate above the average portfolio rate of interest.  Should such an
event occur,  the general  partners  would desire to pay off the line of credit.
Retirement  of the line of credit  would  reduce the  overall  liquidity  of the
partnership.  Cash is  constantly  being  generated  from  borrower  payments of
interest,  principal  and loan  payoffs.  Currently,  cash flow greatly  exceeds
partnership expenses and earnings requirements.  Excess cash flow is invested in
new loan  opportunities,  when available,  and is used to reduce the partnership
credit line or for other partnership business.

     At the time of subscription to the  Partnership,  limited  partners made an
irrevocable decision to either take distributions of earnings monthly, quarterly
or annually or to compound  earnings  in their  capital  account.  For the years
ended December 31, 2001, 2002 and 2003, the Partnership  made  distributions  of
earnings to limited partners of $374,689, $303,020, and $211,610,  respectively.
Distribution  of earnings to limited  partners,  which were not withdrawn  after
allocation of syndication  costs for the years ended December 31, 2001, 2002 and
2003 were  $438,296,  $452,827,  and $375,105,  respectively.  As of December 31
2001, 2002 and 2003, limited partners electing to withdraw earnings  represented
42%, 36% and 34% of the limited partners' capital.

     The Partnership  also allows the limited partners to withdraw their capital
account  subject  to  certain   limitations  (see   liquidation   provisions  of
partnership  agreement).  For the years ended December 31, 2001,  2002 and 2003,
$98,857,  $186,716,  and $22,690 were liquidated  subject to the 10% penalty for
early withdrawal.  These  withdrawals are within the normally  anticipated range
that the general  partners  would expect in their  experience  in this and other
partnerships.  The general  partners  expect that a small  percentage of limited
partners will elect to liquidate their capital accounts over one year with a 10%
early withdrawal penalty. In originally conceiving the Partnership,  the general
partners wanted to provide  limited  partners  needing their capital  returned a
degree of liquidity.  Generally,  limited partners electing to withdraw over one
year need to liquidate their investment to raise cash. The trend the Partnership
is  experiencing  in  withdrawals  by  limited  partners  electing  a  one  year
liquidation  program represents a small percentage of limited partner capital as
of December 31, 2001, 2002, and 2003, respectively.

     Additionally,  for the years  ended  December  31,  2001,  2002,  and 2003,
$1,089,113,  $646,089,  and $376,511,  respectively,  were liquidated by limited
partners who have elected a  liquidation  program over a period of five years or
longer.  This ability to withdraw  after five years by limited  partners has the
effect of providing  limited partner  liquidity.  The general  partners expect a
portion of the limited  partners to take advantage of this  provision.  This has
the  anticipated   effect  of  the  Partnership   growing,   primarily   through
reinvestment of earnings in years one through five. The general  partners expect

                                       13
<PAGE>

to see increasing  numbers of limited partner  withdrawals in years five through
eleven,  after  which time the bulk of those  limited  partners  who have sought
withdrawal  have been  liquidated.  After  year  eleven,  liquidation  generally
subsides.

     Earnings and capital liquidations,  including early withdrawals, during the
three years ended December 31, 2003 were:

                            Years ended December 31,

                            Earnings           Capital
                          Liquidation        Liquidation           Total
                         --------------     -------------      ------------

            2001            $   374,689      *$ 1,187,970       $ 1,562,659

            2002            $   303,020      *$   832,805       $ 1,135,825

            2003            $   211,610      *$   399,201       $   610,811

* These amounts represent gross of early withdrawal penalties.

     In some  cases in order to  satisfy  Broker  Dealers  and  other  reporting
requirements, the general partners have valued the limited partners' interest in
the  Partnership  on a basis which  utilizes a per Unit  system of  calculation,
rather than based upon the investors' capital account. This information has been
reported  in this manner in order to allow the  Partnership  to  integrate  with
certain  software used by the Broker Dealers and other  reporting  entities.  In
those cases, the Partnership will report to Broker Dealers,  Trust Companies and
others a  "reporting"  number of Units based upon a $1.00 per Unit  calculation.
The number of reporting Units provided will be calculated based upon the limited
partner's  capital  account  value  divided by $1.00.  Each  investor's  capital
account balance is set forth  periodically on the Partnership  account statement
provided  to  investors.  The  reporting  Units are solely  for  Broker  Dealers
requiring such information for their software programs and do not reflect actual
Units owned by a limited  partner or the limited  partners' right or interest in
cash flow or any other  economic  benefit in the  Partnership.  Each  investor's
capital  account balance is set forth  periodically  on the Partnership  account
statement  provided  to  investors.  The  amount of  Partnership  earnings  each
investor is entitled to receive is determined by the ratio that each  investor's
capital account bears to the total amount of all investor  capital accounts then
outstanding.  The capital account balance of each investor should be included on
any NASD member client account statement in providing a per Unit estimated value
of the client's investment in the Partnership in accordance with NASD Rule 2340.

     While the general  partners have set an estimated value for the Partnership
Units,  such  determination  may not be  representative  of the  ultimate  price
realized  by an  investor  for such Units upon sale.  No public  trading  market
exists for the Partnership's Units and none is likely to develop. Thus, there is
no certainty  that the Units can be sold at a price equal to the stated value of
the capital account. Furthermore, the ability of an investor to liquidate his or
her investment is limited subject to certain  liquidation rights provided by the
Partnership,  which may include early  withdrawal  penalties (See the section of
the  Prospectus  entitled  "Risk  Factors  -  Purchase  of Units is a long  term
investment").

Current Economic Conditions.

     The  Partnership  makes  loans  primarily  in  Northern  California.  As of
December 31, 2003,  approximately  72.24%  ($5,982,029) of the loans held by the
Partnership  were in five of the San Francisco Bay Area Counties.  The remainder
of the loans held were  secured  primarily  by Northern  California  real estate
outside  the San  Francisco  Bay  Area.  Like  the rest of the  nation,  the San
Francisco  Bay Area felt the recession  and  accompanying  slow down in economic
growth and increasing unemployment.  The technology companies of Silicon Valley,
the airline industry,  the tourism industry and other industries are feeling the
effects of the overall United States economy, which includes lower earnings, job
losses and layoffs.

     Recently the national Northern  California  economies seem to be improving.
Job creation remains a concern, as little job creation seems to be evident.  The
partnership makes loans primarily in Northern  California and real estate values
of residential,  commercial,  multi-family properties and land are of particular
interest  to the  partnership.  Real  estate  is the  primary  security  for the
partnership's loans.

                                       14
<PAGE>

     The residential  real estate market in California  continues to appreciate.
The Office of  Federal  Housing  Enterprise  Oversight  reported  that the state
average  home  prices  rose  13.8%  in  2003.  Southern  California  home  price
appreciation  outpaced  Northern  California home price  appreciation.  Yet even
Santa Clara County had positive  price  appreciation  in 2003.  The  residential
market is not all positive. The luxury home market in the San Francisco Bay Area
is still well below values posted in 1999 and 2000. The strong  residential real
estate outlook implies that  collateral  values behind the  Partnership's  loans
should remain firm and assist in reducing  losses if the take back of collateral
through the foreclosure process should eventuate.

     While the residential  market outlook remains strong overall the commercial
real estate market is not as strong.

     Commercial  property  values are chiefly  tied to the income a property can
produce. Vacancies in office properties since 2000 have risen sharply in the San
Francisco Bay Area. In the fourth quarter of 2003 both BT Commercial Real Estate
and Cornish and Carey  Commercial/Oncor  International  reported declines in San
Francisco  peninsula office vacancies.  Each reported about 1% declines to about
27.3%. Colliers International reported a decline in San Francisco office vacancy
in the fourth quarter of 2003 from 17.3% to 16.9%.  Rents have also continued to
fall and in San  Francisco  the average is $29.31,  which is down from $30.04 at
the start of 2003. These statistics seem to indicate that the commercial  rental
market is stabilizing but that existing vacancies will take a long time to fill.
Commercial  real estate values have decreased but lowered  capitalization  rates
have helped keep commercial  property from large value reductions.  The decrease
in vacancies  could mean improved cash flows for owners,  which  translates into
improved debt service abilities.

     As of December 31, 2003, the Partnership had an average loan to value ratio
based on appraisals  and prior liens as of the date the loan was made of 60.79%.
This did not account for any increases or decreases in property values since the
date  the loan was  made,  nor does it  include  any  reductions  in prior  lien
principal  through  amortization  of payments after the loan was made.  This low
loan to value ratio will assist the Partnership in weathering loan delinquencies
and foreclosures should they eventuate.

     The  foregoing  analysis  of  year  2003  issues  includes  forward-looking
statements  and  predictions  about  possible  or  future  events,   results  of
operations,  and  financial  condition.  As such,  this analysis may prove to be
inaccurate  because of  assumptions  made by the general  partners or the actual
development  of  future  events.  No  assurance  can be given  that any of these
statements or predictions  will ultimately  prove to be correct or substantially
correct.


Item 7a - Quantitative and Qualitative Disclosures About Market Risk

     The  following  table  contains  information  about  the cash held in money
market accounts,  secured loans held in the  Partnership's  portfolio and on our
line of credit as of December 31, 2003. The  presentation,  for each category of
information,  aggregates the assets and  liabilities by their maturity dates for
maturities  occurring  in each of the years  2004  through  2008 and  separately
aggregates the information  for all maturities  arising after 2008. The carrying
values of these assets and liabilities  approximate  their fair market values as
of December 31, 2003:
<TABLE>
<S>                               <C>          <C>          <C>          <C>          <C>        <C>             <C>
                                  2004         2005         2006         2007         2008       Thereafter      Total
                             --------------------------------------------------------------------------------------------
Interest earning assets:
Money market accounts          $  287,315                                                                      $  287,315
Average interest rate               0.68%                                                                           0.68%
Loans secured by deeds
   of trust                    $2,334,650    2,622,109     809,894     1,521,152      199,415      793,606     $8,280,826
Average interest rate              10.78%        9.59%       8.70%         8.13%       10.50%        8.11%          9.45%
Interest bearing
   Liabilities:
Line of credit                 $  200,000                                                                      $  200,000
Average interest rate               4.25%                                                                           4.25%
</TABLE>

                                       15
<PAGE>

Market Risk.

     The Partnership's line of credit bears interest at a variable rate, tied to
the prime rate. As a result, the Partnership's primary market risk exposure with
respect to its  obligations is to changes in interest  rates,  which will affect
the interest cost of outstanding  amounts on the line of credit. The Partnership
may also suffer market risk tied to general trends  affecting real estate values
that may impact the Partnership's security for its loans.

     The Partnership's  primary market risk in terms of its profitability is the
exposure to  fluctuations  in earnings  resulting from  fluctuations  in general
interest  rates.  The majority of the  Partnership's  mortgage loans (100% as of
December 31, 2003) earn interest at fixed rates.  Changes in interest  rates may
also affect the value of the Partnership's  investment in mortgage loans and the
rates at which the Partnership reinvests funds obtained from loan repayments and
new capital contributions from limited partners. If interest rates increase, the
interest  rates the  Partnership  obtains from  reinvested  funds will generally
increase,  but the value of the Partnership's existing loans at fixed rates will
generally  tend to  decrease.  The  risk  is  mitigated  by the  fact  that  the
Partnership  does not intend to sell its loan  portfolio,  rather such loans are
held until they are paid off. If interest rates decrease,  the amounts  becoming
available to the  Partnership  for  investment  due to repayment of  Partnership
loans may be  reinvested  at lower rates than the  Partnership  had been able to
obtain in prior investments, or than the rates on the repaid loans. In addition,
interest rate  decreases may encourage  borrowers to refinance  their loans with
the  Partnership at a time where the  Partnership is unable to reinvest in loans
of comparable value.

     The  Partnership  does not hedge or otherwise seek to manage  interest rate
risk. The Partnership does not enter into risk sensitive instruments for trading
purposes.


PORTFOLIO REVIEW - For the years ended December 31, 2001, 2002 and 2003.

Loan Portfolio

     The Partnership's  loan portfolio  consists primarily of short-term (one to
five years),  fixed rate loans secured by real estate.  As of December 31, 2001,
2002 and 2003 the  Partnership's  loans secured by real  property  collateral in
five of the San Francisco Bay Area counties  (San  Francisco,  San Mateo,  Santa
Clara,  Alameda and Contra Costa) represented  $6,784,000  (67.20%),  $3,353,000
(52.20%), and $5,982,000 (72.24%), respectively, of the outstanding secured loan
portfolio.  The  remainder of the  portfolio  represented  loans secured by real
estate located primarily in Northern California.

     The  following  table  sets  forth the  distribution  of loans  held by the
Partnership  by property  type for the years ended  December 31, 2001,  2002 and
2003:
<TABLE>
<S>                                    <C>                 <C>        <C>                <C>         <C>               <C>
                                                                           December 31,
                                      ---------------------------------------------------------------------------------------

                                                2001                           2002                          2003
                                      --------------------------     --------------------------     -------------------------

Single-family homes (1-4 units)
   - owner occupied                    $   622,435         6.17%      $ 1,037,474        16.15%      $  853,869        10.31%
Single-family homes (1-4 units)
   - non-owner occupied                  1,435,444        14.23%          575,051         8.95%       1,589,092        19.19%
Apartments (over 4 units)                1,563,213        15.50%          708,648        11.03%       1,367,327        16.51%
Commercial                               3,280,000        32.50%        2,045,811        31.85%       2,410,861        29.11%
Land                                     3,190,103        31.60%        2,057,000        32.02%       2,059,677        24.88%
                                      ------------    ----------     ------------    ----------     -----------    ----------

          Total                        $10,091,195       100.00%      $ 6,423,984       100.00%      $8,280,826       100.00%
                                      ============    ==========     ============    ==========     ===========    ==========
</TABLE>

                                       16
<PAGE>

     As of December 31, 2003, the Partnership  held 23 loans secured by deeds of
trust. The following table sets forth the priorities,  asset  concentrations and
maturities of the secured loans held by the Partnership as of December 31, 2003.

        PRIORITIES, ASSET CONCENTRATIONS AND MATURITIES OF SECURED LOANS
                             As of December 31, 2003
<TABLE>
<S>     <C>                                                <C>                 <C>             <C>
                                                           # of Loans          Amount          Percent
                                                          -------------     ------------      ----------

        1st Mortgages                                                12       $3,733,346          45.09%
        2nd Mortgages                                                10        3,872,480          46.76%
        3rd Mortgages                                                 1          675,000           8.15%
                                                          =============     ============      ==========
              Total                                                  23       $8,280,826         100.00%

        Maturing in 2004                                              8       $2,334,650          28.19%
        Maturing in 2005                                              5        2,622,109          31.67%
        Maturing in 2006                                              2          809,894           9.78%
        Maturing after 12/31/06                                       8        2,514,171          30.36%
                                                          =============     ============      ==========
              Total                                                  23       $8,280,826         100.00%

        Average Secured Loan                                                  $  360,036           4.35%
        Largest Secured Loan                                                   1,000,000          12.08%
        Smallest Secured Loan                                                     11,703           0.14%
        Average Loan-to-Value based upon appraisals
          and prior liens at time of loan                                                         60.79%
</TABLE>

     The  Partnership's  largest  loan in the  principal  amount  of  $1,000,000
represents 12.08% of outstanding secured loans and 10.77% of Partnership assets.
Larger  loans  sometimes  increase  above 10% of the secured  loan  portfolio or
Partnership assets as these amounts decrease due to limited partner  withdrawals
and loan payoffs.


ASSET QUALITY

     A consequence  of lending  activities is that  occasionally  losses will be
experienced  and that the  amount  of such  losses  will vary from time to time,
depending  upon the risk  characteristics  of the loan  portfolio as affected by
economic  conditions and the financial  experiences of borrowers.  Many of these
factors  are beyond the  control of the  general  partners.  There is no precise
method of predicting  specific  losses or amounts that ultimately may be charged
off on  particular  segments of the loan  portfolio,  especially in light of the
current economic environment.

     The conclusion that a loan may become  uncollectible,  in whole or in part,
is  a  matter  of  judgment.  Although  institutional  lenders  are  subject  to
requirements and regulations  that, among other things,  require them to perform
ongoing analyses of their portfolios,  loan-to-value ratios, reserves, etc., and
to obtain and maintain  current  information  regarding  their borrowers and the
securing properties, the Partnership is not subject to these regulations and has
not  adopted  certain of these  practices.  Rather,  the  general  partners,  in
connection  with  the  periodic  closing  of  the  accounting   records  of  the
Partnership and the preparation of the financial  statements,  determine whether
the allowance for loan losses is adequate to cover  potential loan losses of the
Partnership.  As of December 31, 2003 the general  partners have determined that
the  allowance  for loan  losses  of  $680,469  (7.53%  of net  assets)  and the
allowance  for real estate  held for sale of  $630,169  (6.98% of net assets) is
adequate in amount.  Because of the number of variables involved,  the magnitude
of the swings  possible and the general  partners'  inability to control many of
these factors,  actual results may and do sometimes  differ  significantly  from
estimates made by the general partners. As of December 31, 2003, five loans were
delinquent over 90 days amounting to $2,259,756.

                                       17
<PAGE>

     The Partnership also makes loans requiring periodic disbursements of funds.
As of December 31, 2003 there were two such loans. These loans include ground up
construction of buildings and loans for  rehabilitation of existing  structures.
Interest on these loans is  computed at simple  interest  method and only on the
amounts disbursed on a daily basis.

     A summary  of the  status  of the  Partnership's  construction  loans as of
December 31, 2003 is set forth below:

                              Complete Construction         Rehabilitation
                              ---------------------        ----------------

      Disbursed funds              $      0                  $1,202,431
      Undisbursed funds            $      0                  $   75,255


Item 8 - Financial Statements and Supplementary Data


A - Financial Statements

     The following  financial  statements of Redwood Mortgage  Investors VII are
included in Item 8:

  o    Independent Auditors' Report
  o    Balance Sheets - December 31, 2003, and December 31, 2002
  o    Statements of Income for the years ended December 31, 2003, 2002
       and 2001
  o    Statements of Changes in Partners' Capital for the years ended
       December 31, 2003, 2002 and 2001
  o    Statements of Cash Flows for the years ended December 31, 2003, 2002
       and 2001
  o    Notes to Financial Statements


B - Financial Statement Schedules

     The following  financial  statement schedules of Redwood Mortgage Inventors
VII are included in Item 8.

  o    Schedule II  - Valuation and Qualifying Accounts
  o    Schedule IV - Mortgage Loans on Real Estate

     All  other  schedules  for  which  provision  is  made  in  the  applicable
accounting  regulations  of the  Securities  and  Exchange  Commission  are  not
required under the related instructions or are inapplicable,  and therefore have
been omitted.


                                       18
<PAGE>













                         REDWOOD MORTGAGE INVESTORS VII
                       (A CALIFORNIA LIMITED PARTNERSHIP)
                              FINANCIAL STATEMENTS
                        AS OF DECEMBER 31, 2003 AND 2002
                         AND FOR EACH OF THE THREE YEARS
                      IN THE PERIOD ENDED DECEMBER 31, 2003














                                       19
<PAGE>







TABLE OF CONTENTS

                                                               Page No.
  Independent Auditors' Report                                    21

  Balance Sheets                                                  22

  Statements of Income                                            23

  Statements of Changes in Partners' Capital                      24

  Statements of Cash Flows                                        25

  Notes to Financial Statements                                   26

  Supplemental Schedules

      Schedule II - Valuation and Qualifying Accounts             37

      Schedule IV - Mortgage Loans on Real Estate                 38






                                       20
<PAGE>



                                ARMANINO McKENNA
                          CERTIFIED PUBLIC ACCOUNTANTS
                         12667 Alcosta Blvd., Suite 500
                               San Ramon, CA 94583
                                 (925) 790-2600





                          INDEPENDENT AUDITORS' REPORT


To the Partners
Redwood Mortgage Investors VII
Redwood City, California

     We have  audited  the  accompanying  balance  sheets  of  Redwood  Mortgage
Investors VII (a  California  limited  partnership)  as of December 31, 2003 and
2002 and the related statements of income, changes in partners' capital and cash
flows for each of the three years in the period ended  December 31, 2003.  These
financial statements are the responsibility of the Partnership's management. Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

     We conducted our audits in accordance  with  auditing  standards  generally
accepted in the United States of America.  Those standards  require that we plan
and  perform  the  audits to  obtain  reasonable  assurance  about  whether  the
financial  statements  are free of  material  misstatement.  An  audit  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial  statements.  An audit also  includes  assessing  the  accounting
principles  used  and  significant  estimates  made  by  management,  as well as
evaluating the overall  financial  statement  presentation.  We believe that our
audits provide a reasonable basis for our opinion.

     In our opinion,  the financial statements referred to above present fairly,
in all material  respects,  the financial position of Redwood Mortgage Investors
VII as of December 31, 2003 and 2002 and the results of its  operations and cash
flows for each of the three years in the period  ended  December  31,  2003,  in
conformity with accounting principles generally accepted in the United States of
America.

     Our  audits  were  conducted  for the  purpose of forming an opinion on the
basic financial  statements taken as a whole.  Schedules II and IV are presented
for purposes of  additional  analysis  and are not a required  part of the basic
financial  statements.  Such  information  has been  subjected  to the  auditing
procedures  applied in the audits of the basic financial  statements and, in our
opinion,  is fairly  stated in all  material  respects  in relation to the basic
financial statements taken as a whole.



                                          ARMANINO McKENNA  LLP

San Ramon, California
February 13, 2004


                                       21
<PAGE>


                          REDWOOD MORTGAGE INVETORS VII
                       (A California Limited Partnership)
                                 BALANCE SHEETS
                           DECEMBER 31, 2003 AND 2002


                                     ASSETS

                                                         2003           2002
                                                     ------------  ------------

Cash and cash equivalents                             $   321,114   $ 1,057,845
                                                     ------------  ------------

Loans
   Loans secured by deeds of trust                      8,280,826     6,423,984
   Loans, unsecured, net of discount of $128,920
     and $150,407 in 2003 and 2002, respectively          232,551       216,770
   Allowance for loan losses                            (680,469)     (791,882)
                                                     ------------  ------------
     Net loans                                          7,832,908     5,848,872
                                                     ------------  ------------

Interest and other receivables
   Accrued interest and late fees                         489,995       304,936
   Advances on loans                                        6,484        17,230
                                                     ------------  ------------
     Total interest and other receivables                 496,479       322,166
                                                     ------------  ------------

Investment in limited liability company                         -     1,212,722
                                                     ------------  ------------

Real estate held for sale, net                            633,053       683,136
                                                     ------------  ------------

     Total assets                                     $ 9,283,554   $ 9,124,741
                                                     ============  ============


                        LIABILITIES AND PARTNERS' CAPITAL

Liabilities
   Line of credit                                     $   200,000   $         -
   Accounts payable                                         4,102         2,593
   Payable to affiliate                                    51,288        32,176
   Deferred interest                                            -        37,704
                                                     ------------  ------------
     Total liabilities                                    255,390        72,473
                                                     ------------  ------------

Partners' capital
   Limited partners' capital, subject to redemption     9,016,191     9,040,290
   General partners' capital                               11,973        11,978
                                                     ------------  ------------
     Total partners' capital                            9,028,164     9,052,268
                                                     ------------  ------------

     Total liabilities and  partners' capital         $ 9,283,554   $ 9,124,741
                                                     ============  ============



     The accompanying notes are an integral part of these financial statements

                                       22
<PAGE>


                          REDWOOD MORTGAGE INVETORS VII
                       (A California Limited Partnership)
                              STATEMENTS OF INCOME
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<TABLE>
<S>                                                                            <C>            <C>            <C>
                                                                               2003           2002           2001
                                                                            ------------   -------------  -------------
Revenues
   Interest on loans                                                          $  748,625     $ 1,037,717    $ 1,172,474
   Late fees                                                                      24,053          24,920          8,495
   Other                                                                           9,602          15,549         11,412
                                                                            ------------   -------------  -------------
                                                                                 782,280       1,078,186      1,192,381
                                                                            ------------   -------------  -------------

Expenses
   Mortgage servicing fees                                                        73,062         163,531         94,396
   Interest expense                                                                8,972          54,724        128,224
   Clerical costs from Redwood Mortgage Corp.                                     23,014          30,572         38,313
   Asset management fees                                                          34,011          34,869         37,233
   Provisions for (recovery of) losses on loans and real estate                 (18,299)        (20,039)         37,371
   Professional services                                                          43,752          40,158         23,868
   Other                                                                          25,127          10,889         11,779
                                                                            ------------   -------------  -------------
                                                                                 189,639         314,704        371,184
                                                                            ------------   -------------  -------------

Net income                                                                    $  592,641     $   763,482    $   821,197
                                                                            ============   =============  =============

Net income
   General partners (1%)                                                      $    5,926     $     7,635    $     8,212
   Limited partners (99%)                                                        586,715         755,847        812,985
                                                                            ------------   -------------  -------------

                                                                              $  592,641     $   763,482    $   821,197
                                                                            ============   =============  =============

Net income per $1,000 invested by limited partners for entire period
   Where income is reinvested and compounded                                  $       67     $        85    $        85
   Where partner receives income in monthly distributions                     $       65     $        82    $        82
</TABLE>





     The accompanying notes are an integral part of these financial statements

                                       23
<PAGE>



                          REDWOOD MORTGAGE INVETORS VII
                       (A California Limited Partnership)
                   STATEMENTS OF CHANGES IN PARTNERS' CAPITAL
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<TABLE>
<S>                                               <C>            <C>              <C>            <C>               <C>
                                                           Limited Partners' Capital
                                                -------------------------------------------

                                                  Limited                         Total          General
                                                 Partners'       Formation       Limited         Partners'         Total
                                                  Capital          Loan         Partners'        Capital         Partners'
                                                  Accounts      Receivable       Capital         Accounts         Capital
                                                ------------   ------------    -------------   ------------    -------------

Balances at December 31, 2000                    $10,169,942    $  (75,612)      $10,094,330    $    11,978      $10,106,308

   Collections on Formation Loan                           -         71,460           71,460              -           71,460

   Net income                                        812,985              -          812,985          8,212          821,197

   Early withdrawal penalties                        (7,908)          4,152          (3,756)              -          (3,756)

   Partners' withdrawals                         (1,554,751)              -      (1,554,751)        (8,212)      (1,562,963)
                                                ------------   ------------    -------------   ------------    -------------

Balances at December 31, 2001                      9,420,268              -        9,420,268         11,978        9,432,246

   Net income                                        755,847              -          755,847          7,635          763,482

   Early withdrawal penalties                       (11,619)              -         (11,619)              -         (11,619)

   Partners' withdrawals                         (1,124,206)              -      (1,124,206)        (7,635)      (1,131,841)
                                                ------------   ------------    -------------   ------------    -------------

Balances at December 31, 2002                      9,040,290              -        9,040,290         11,978        9,052,268

   Net income                                        586,715              -          586,715          5,926          592,641

   Early withdrawal penalties                        (1,815)              -          (1,815)              -          (1,815)

   Partners' withdrawals                           (608,999)              -        (608,999)        (5,931)        (614,930)
                                                ------------   ------------    -------------   ------------    -------------

Balances at December 31, 2003                    $ 9,016,191    $         -      $ 9,016,191    $    11,973      $ 9,028,164
                                                ============   ============    =============   ============    =============
</TABLE>







     The accompanying notes are an integral part of these financial statements

                                       24
<PAGE>

                          REDWOOD MORTGAGE INVETORS VII
                       (A California Limited Partnership)
                             STATEMENTS OF CASH FLOW
              FOR THE YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001

<TABLE>
<S>                                                                         <C>            <C>             <C>
                                                                            2003           2002            2001
                                                                        ------------   ------------    ------------
Cash flows from operating activities
   Net income                                                            $   592,641    $   763,482     $   821,197
   Adjustments to reconcile net income to
    net cash provided by operating activities
     Provisions for (recovery of) losses on loans and real estate           (18,299)       (20,039)          37,371
     Early withdrawal penalty credited to income                             (1,815)       (11,619)         (3,756)
     Amortization of discount on unsecured loans                            (21,487)              -               -
     Change in operating assets and liabilities
        Loans, unsecured                                                       5,706         45,292          14,690
        Accrued interest and late fees                                     (273,744)       (73,456)       (302,868)
        Advances on loans                                                    (7,767)       (47,216)        (20,840)
        Accounts payable                                                       1,509        (8,702)           7,193
        Payable to affiliate                                                  19,112         28,860           3,316
        Deferred interest                                                   (37,704)         35,382           2,322
                                                                        ------------   ------------    ------------
Net cash provided by operating activities                                    258,152        711,984         558,625
                                                                        ------------   ------------    ------------

Cash flows from investing activities
   Principal collected on loans                                            2,556,852      4,569,574       6,123,575
   Loans originated                                                      (4,349,527)    (1,447,329)     (3,066,276)
   Payments for real estate                                                        -       (11,033)       (449,197)
   Proceeds from disposition of real estate                                        -              -          38,620
   Payments on investment in limited liability company                     (149,693)      (116,354)               -
   Proceeds from investment in limited liability company                   1,362,415              -               -
                                                                        ------------   ------------    ------------
Net cash provided by (used in) investing activities                        (579,953)      2,994,858       2,646,722
                                                                        ------------   ------------    ------------

Cash flows from financing activities
   Borrowings (repayments) on line of credit, net                            200,000    (1,907,000)     (1,593,000)
   Formation loan collections                                                      -              -          71,460
   Partners' withdrawals                                                   (614,930)    (1,131,841)     (1,562,963)
                                                                        ------------   ------------    ------------
Net cash used in financing activities                                      (414,930)    (3,038,841)     (3,084,503)
                                                                        ------------   ------------    ------------

Net increase (decrease) in cash and cash equivalents                       (736,731)        668,001         120,844

Cash and cash equivalents at beginning of year                             1,057,845        389,844         269,000
                                                                        ------------   ------------    ------------

Cash and cash equivalents at end of year                                 $   321,114    $ 1,057,845     $   389,844
                                                                        ============   ============    ============

Supplemental disclosures of cash flow information
   Cash payments for interest                                            $     8,972    $    54,724     $   128,224
</TABLE>



     The accompanying notes are an integral part of these financial statements

                                       25
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


1.     Organization and General

     Redwood Mortgage Investors VII, (the "Partnership") is a California limited
partnership  organized  on June 30,  1989.  The general  partners are Michael R.
Burwell, an individual,  and GYMNO Corporation,  a California  corporation.  The
Partnership  was  organized  to engage in business as a mortgage  lender for the
primary  purpose of making loans  secured by deeds of trust on  California  real
estate.  Loans are being  arranged and serviced by Redwood  Mortgage  Corp.,  an
affiliate of the general partners.

       Term of the Partnership

     The  Partnership  is scheduled  to  terminate on December 31, 2029,  unless
sooner terminated as provided in the partnership agreement.


2.     Summary of Significant Accounting Policies

       Management estimates

     The  preparation  of financial  statements  in conformity  with  accounting
principles   generally  accepted  in  the  United  States  of  America  requires
management  to make  estimates  and  assumptions  about the reported  amounts of
assets and liabilities, and disclosures of contingent assets and liabilities, at
the dates of the financial  statements and the reported  amounts of revenues and
expenses during the reported periods.  Such estimates relate  principally to the
determination  of the  allowance  for loan losses,  including  the  valuation of
impaired  loans and the valuation of real estate held for sale.  Actual  results
could differ significantly from these estimates.

       Loans, secured by deeds of trust

     Loans generally are stated at their  outstanding  unpaid principal  balance
with interest thereon being accrued by the effective interest method.

     If the probable  ultimate  recovery of the carrying  amount of a loan, with
due  consideration  for the fair value of  collateral,  is less than amounts due
according to the contractual  terms of the loan agreement,  and the shortfall in
the  amounts  due are not  insignificant,  the  carrying  amount  of the loan is
reduced  to the  present  value of future  cash flows  discounted  at the loan's
effective interest rate. If a loan is collateral dependent,  it is valued at the
estimated fair value of the related collateral.

     If events and or changes in circumstances  cause management to have serious
doubts about the further  collectibility of the contractual payments, a loan may
be  categorized  as impaired and interest is no longer  accrued.  Any subsequent
payments on impaired loans are applied to reduce the  outstanding  loan balances
including  accrued  interest and advances.  At December 31, 2003 and 2002, there
were loans  categorized  as impaired by the  Partnership of $96,710 and $96,710,
respectively.  In addition, the impaired loans had accrued interest and advances
totaling  $7,977 and $7,841 at  December  31, 2003 and 2002,  respectively.  The
reduction  in  carrying  value of the  impaired  loans of $14,596  and $6,620 at
December 31, 2003 and 2002, respectively,  is included in the allowance for loan
losses.  The average  recorded  investment  in the  impaired  loans was $96,710,
$493,074 and $890,018 for December 31, 2003, 2002 and 2001, respectively.

                                       26
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


2.     Summary of Significant Accounting Policies (continued)

       Loans, secured by deeds of trust (continued)

     At December 31, 2003 and 2002, the  Partnership  had 5 and 9 loans past due
90  days  or  more  totaling  $2,259,756  and  $2,913,212,   respectively.   The
Partnership  does not  consider  these  loans to be  impaired  because  there is
sufficient  collateral to cover the amount outstanding to the Partnership and is
still  accruing  interest  on these  loans.  At December  31, 2003 and 2002,  as
presented in Note 11, the average loan to appraised  value of security  based on
appraisals and prior liens at the time the loans were consummated was 60.79% and
65.86%,  respectively.  When loans are  considered  impaired,  the  allowance is
updated to reflect the change in the valuation of collateral security.  However,
a low  loan  to  value  ratio  has  the  tendency  to  minimize  reductions  for
impairment.

     During 2003, the Partnership  restructured two loans into one existing loan
with a lower interest rate. The amount restructured was $579,005.

     During 2002, the Partnership  restructured  four previously  impaired loans
into two new loans  with a lower  interest  rate.  The amount  restructured  was
$1,246,754.

       Allowance for loan losses

     Loans and the related accrued interest, late fees and advances are analyzed
on a continuous  basis for  recoverability.  Delinquencies  are  identified  and
followed as part of the loan system.  Delinquencies  are  determined  based upon
contractual  terms.  A provision is made for loan losses to adjust the allowance
for loan losses to an amount  considered by management to be adequate,  with due
consideration  to  collateral  value,  to provide  for  unrecoverable  loans and
receivables,  including impaired loans, other loans, accrued interest, late fees
and advances on loans and other accounts receivable (unsecured). The Partnership
charges  off  uncollectible  loans  and  related  receivables  directly  to  the
allowance account once it is determined that the full amount is not collectible.

     The  composition  of the  allowance for loan losses as of December 31, 2003
and 2002 was as follows:

                                       2003            2002
                                    -----------     -----------

           Impaired loans              $ 14,596        $  6,620
           Specified loans              321,263         163,731
           General                      236,984         533,200
           Unsecured loans              107,626          88,331
                                    -----------     -----------

                                       $680,469        $791,882
                                    ===========     ===========

     Activity in the allowance for loan losses is as follows for the years ended
December 31:

                                         2003            2002          2001
                                       ----------    -----------   -----------

           Beginning balance             $791,882       $887,578      $850,548
           Provision for loan losses            -         20,394        37,371
           Recoveries                    (18,299)       (40,433)             -
           Restructures / transfers      (50,083)       (64,210)             -
           Write-offs                    (43,031)       (11,447)         (341)
                                       ----------    -----------   -----------

                                         $680,469       $791,882      $887,578
                                       ==========    ===========   ===========


                                       27
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


2.     Summary of Significant Accounting Policies (continued)

       Cash and cash equivalents

     The  Partnership  considers all highly liquid  financial  instruments  with
maturities  of  three  months  or  less  at the  time  of  purchase  to be  cash
equivalents.

       Real estate held for sale

     Real estate held for sale includes real estate acquired through foreclosure
and is stated  at the lower of the  recorded  investment  in the loan,  plus any
senior  indebtedness,  or at the property's estimated fair value, less estimated
costs to sell.

     The Partnership  periodically compares the carrying value of real estate to
expected  future  undiscounted  cash  flows for the  purpose  of  assessing  the
recoverability  of the recorded  amounts.  If the carrying  value exceeds future
undiscounted  cash flows, the assets are reduced to fair value.  During 2003 and
2002, the Partnership transferred $50,083 and $200,030,  respectively,  from the
allowance  for loan losses to the  allowance  for losses on real estate held for
sale.

       Investment in limited liability company

     Investment in limited  liability  company is accounted for using the equity
method.  In 2003 and 2002, the Company had a 34% interest in the Stockton Street
Property Company, LLC (see Note 6).

       Income taxes

     No  provision  for federal and state income taxes (other than an $800 state
minimum  tax) is made in the  financial  statements  since  income taxes are the
obligation of the partners if and when income taxes apply.

       Net income per $1,000 invested

     Amounts  reflected  in the  statements  of income as net  income per $1,000
invested by limited  partners  for the entire  period are amounts  allocated  to
limited partners who had their investment throughout the period and have elected
to either leave their  earnings to compound or have  elected to receive  monthly
distributions  of their net income.  Individual  income is allocated  each month
based on the limited partners' pro rata share of partners' capital.  Because the
net income percentage  varies from month to month,  amounts per $1,000 will vary
for those  individuals who made or withdrew  investments  during the period,  or
select other options.

       Late fee revenue

     Late fees are generally  charged at 6% of the monthly  installment  payment
past due. During 2003,  2002 and 2001, late fee revenue of $24,053,  $24,920 and
$8,495, respectively, was recorded. The Partnership has a late fee receivable at
December 31, 2003 and 2002 of $24,118 and $13,320.

                                       28
<PAGE>


                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


2.     Summary of Significant Accounting Policies (continued)

       Reclassification

     Certain reclassifications,  not affecting previously reported net income or
total  partners'  capital,  have been made to the  previously  issued  financial
statements to conform to the current year presentation.

      Recently issued accounting pronouncements

     In November 2002, the Financial  Accounting  Standards  Board (FASB) issued
FASB Interpretation 45, "Guarantor's  Accounting and Disclosure Requirements for
Guarantees,  Including Indirect  Guarantees of Indebtedness of Others" (FIN 45).
FIN 45 requires the recognition of liabilities for guarantees that are issued or
modified  subsequent to December 31, 2002.  The  liabilities  should reflect the
fair value,  at  inception,  of the  guarantor's  obligations  to stand ready to
perform, in the event that the specified  triggering events or conditions occur.
The  implementation  of  FIN 45 did  not  have  any  significant  effect  on the
Partnership.

     In January  2003,  FASB issued FASB  Interpretation  46  "Consolidation  of
Variable Interest Entities, an Interpretation of ARB No. 51" (FIN 46). FIN 46 is
effective  immediately for any variable  interest entities created after January
31, 2003 and is effective beginning in the third quarter of 2003 to any variable
interest  entities created prior to the issuance of the  interpretation.  FIN 46
provides a new framework to identify variable interest entities and to determine
when an entity should include the assets, liabilities, non-controlling interests
and the results of  activities  of a variable  interest  entity in its financial
statements.  The implementation of FIN 46 did not have any significant effect on
the Partnership.

     In December 2003, the American  Institute of Certified  Public  Accountants
(AICPA)  Accounting  Standards  Executive  Committee (AcSEC) issued Statement of
Position 03-03,  "Accounting for Certain Loans or Debt Securities  Acquired in a
Transfer"(SOP  03-3).  SOP 03-03 is effective for loans acquired in fiscal years
beginning  after December 15, 2004,  with early adoption  encouraged.  SOP 03-03
addresses  accounting for differences  between  contractual  cash flows and cash
flows expected to be collected from an investor's initial investment in loans or
debt securities acquired in a transfer if those differences are attributable, at
least in part,  to credit  quality.  It  includes  loans  acquired  in  business
combinations   and   applies   to  all   nongovernmental   entities,   including
not-for-profit organizations.  The SOP does not apply to loans originated by the
entity.  The  implementation  of  SOP  03-03  is not  anticipated  to  have  any
significant effect on the Partnership.


3.     Other Partnership Provisions

     The Partnership is a California limited partnership. The rights, duties and
powers of the general and limited  partners of the  partnership  are governed by
the limited  partnership  agreement and Sections 15611 et seq. of the California
Corporations Code.

     The general partners are in complete  control of the Partnership  business,
subject to the voting rights of the limited partners on specified  matters.  Any
one of the general  partners acting alone has the power and authority to act for
and bind the Partnership.

                                       29
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


3.     Other Partnership Provisions (continued)

     A majority of the outstanding  limited  partnership  interests may, without
the permission of the general partners,  vote to: (i) terminate the partnership,
(ii) amend the limited  partnership  agreement,  (iii) approve or disapprove the
sale of all or  substantially  all of the  assets  of the  Partnership  and (iv)
remove or replace one or all of the general partners.

     The approval of all the limited partners is required to elect a new general
partner to continue the Partnership business where there is no remaining general
partner  after a general  partner  ceases to be a general  partner other than by
removal.

     Election to receive monthly, quarterly or annual distributions

     At subscription,  investors elected either to receive monthly, quarterly or
annual distributions of earnings allocations,  or to allow earnings to compound.
Subject to certain  limitations,  a compounding investor may subsequently change
his  election,  but  an  investor's  election  to  have  cash  distributions  is
irrevocable.

     Profits and losses

     Profits and losses are allocated  among the limited  partners  according to
their respective capital accounts monthly after 1% of the profits and losses are
allocated to the general partners.

     Liquidity, capital withdrawals and early withdrawals

     There are substantial  restrictions on transferability of Partnership units
and accordingly an investment in the Partnership is not liquid. Limited partners
have no right to withdraw from the  Partnership or to obtain the return of their
capital account for at least one year from the date of purchase of units.

     In order to provide a certain  degree of liquidity to the limited  partners
after the one-year  period,  limited  partners may withdraw all or part of their
capital accounts from the Partnership in four quarterly  installments  beginning
on the last day of the  calendar  quarter  following  the  quarter  in which the
notice of withdrawal is given,  subject to a 10% early withdrawal  penalty.  The
10% penalty is  applicable  to the amount  withdrawn  early and will be deducted
from the capital account.

     After five years from the date of purchase of the units,  limited  partners
have the  right to  withdraw  from the  Partnership,  on an  installment  basis.
Generally this is done over a five-year period in twenty quarterly installments.
Once a limited  partner has been in the  Partnership  for the minimum  five-year
period,  no penalty will be imposed if  withdrawal  is made in twenty  quarterly
installments  or longer.  Notwithstanding  the five-year (or longer)  withdrawal
period,  the general  partners may liquidate all or part of a limited  partner's
capital account in four quarterly  installments beginning on the last day of the
calendar  quarter  following  the quarter in which the notice of  withdrawal  is
given. This withdrawal is subject to a 10% early withdrawal  penalty  applicable
to any sums withdrawn prior to the time when such sums could have been withdrawn
without penalty.

     The Partnership will not establish a reserve from which to fund withdrawals
and,  accordingly,  the  Partnership's  capacity  to return a limited  partner's
capital  account is restricted to the  availability  of  Partnership  cash flow.
Furthermore,  no more than 20% of the total limited  partners'  capital accounts
outstanding  at the  beginning  of any  year,  shall be  liquidated  during  any
calendar year.

                                       30
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


4.     General Partners and Related Parties

     The  following are  commissions  and fees which will be paid to the general
partners and affiliates:

       Mortgage brokerage commissions

     For fees in connection with the review, selection, evaluation,  negotiation
and extension of loans, the Partnership may collect an amount  equivalent to 12%
of the loaned amount until 6 months after the termination  date of the offering.
Thereafter, loan brokerage commissions (points) will be limited to an amount not
to exceed 4% of the  total  Partnership  assets  per  year.  The loan  brokerage
commissions  are paid by the  borrowers  and  thus,  are not an  expense  of the
Partnership.  During 2003, 2002 and 2001, loan brokerage commissions paid by the
borrowers were $111,927, $24,661 and $84,137, respectively.

       Mortgage servicing fees

     Monthly  mortgage  servicing  fees of up to 1/8 of 1% (1.5%  annual) of the
unpaid  principal  are paid to  Redwood  Mortgage  Corp.,  based  on the  unpaid
principal balance of the loan portfolio,  or such lesser amount as is reasonable
and customary in the geographic area where the property securing the mortgage is
located. Once a loan is categorized as impaired,  mortgage servicing fees are no
longer  accrued.  Additional  service fees are recorded  upon the receipt of any
subsequent  payments  on impaired  loans.  Mortgage  servicing  fees of $73,062,
$163,531 and $94,396 were incurred for 2003,  2002 and 2001,  respectively.  The
Partnership  has a payable to  Redwood  Mortgage  Corp.  for  servicing  fees of
$51,288 and $32,176 at December 31, 2003 and 2002, respectively.

       Asset management fee

     The general  partners  receive monthly fees for managing the  Partnership's
loan  portfolio and operations of up to 1/32 of 1% of the "net asset value" (3/8
of 1%  annually).  Asset  management  fees of $34,011,  $34,869 and $37,233 were
incurred for 2003, 2002 and 2001, respectively.

       Other fees

     The  Partnership  Agreement  provides for other fees such as  reconveyance,
mortgage  assumption and mortgage  extension fees. Such fees are incurred by the
borrowers and are paid to parties related to the general partners.

       Operating expenses

     Redwood Mortgage Corp., an affiliate of the general partners, is reimbursed
by the Partnership for all operating  expenses actually incurred by it on behalf
of the Partnership,  including  without  limitation,  out-of-pocket  general and
administration  expenses of the  Partnership,  accounting and audit fees,  legal
fees and  expenses,  postage  and  preparation  of reports to limited  partners.
During 2003, 2002 and 2001,  operating  expenses totaling  $23,014,  $30,572 and
$38,313, respectively, were reimbursed to Redwood Mortgage Corp.

                                       31
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


5.     Real Estate Held for Sale

     The following  schedule  reflects the costs of real estate acquired through
foreclosure  and the recorded  reductions  to estimated  fair values,  including
estimated costs to sell as of December 31, 2003 and 2002:

                                                  2003            2002
                                              ------------    ------------

         Costs of properties                   $ 1,263,222     $ 1,263,222
         Reduction in value                      (630,169)       (580,086)
                                              ------------    ------------

            Real estate held for sale, net     $   633,053     $   683,136
                                              ============    ============


6.     Investment in Limited Liability Company

     As a result of acquiring real property through foreclosure, the Partnership
transferred its interest  (principally land and building) to a limited liability
company ("LLC"), Stockton Street Property Company LLC, which is owned 34% by the
Partnership and 66% by an affiliate.  Development costs were capitalized  during
construction; thus, there was no income or expense recognized by Stockton during
2002 and a portion of 2003. During 2003, the LLC completed  construction and the
property was sold.  The  Partnership  recognized  a loss of $42,518  during 2003
related to this property.


7.     Bank Line of Credit

     The  Partnership has a bank line of credit secured by its loan portfolio of
up to $3,500,000 at .25% over prime. The balances outstanding as of December 31,
2003 and 2002 were  $200,000 and $0,  respectively,  and the  interest  rate was
4.25% (4.00% prime + .25%) at December  31,  2003.  This line of credit  expires
December  2,  2004  and  requires  the  Partnership  to meet  certain  financial
covenants.  As of December 31, 2003 and 2002, the  Partnership was in compliance
with all loan covenants.


8.     Income Taxes

     The following  reflects a reconciliation  of partners' capital reflected in
the financial statements to the tax basis of the Partnership capital:

                                                       2003             2002
                                                    ------------   ------------

       Partners' capital per financial statements    $ 9,028,164    $ 9,052,268
       Allowance for loan losses                         680,469        791,882
       Allowance for real estate losses                  630,169        580,086
                                                    ------------   ------------

           Partners' capital tax basis               $10,338,802    $10,424,236
                                                    ============   ============

     In 2003 and 2002,  approximately  69% of taxable  income was  allocated  to
tax-exempt organizations (i.e., retirement plans).

                                       32
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


9.     Fair Value of Financial Instruments

     The following  methods and assumptions were used to estimate the fair value
of financial instruments:

     (a) Cash and Cash  Equivalents - The carrying amount equals fair value. All
amounts, including interest bearing, are subject to immediate withdrawal.

     (b) Secured  loans had a carrying  value of  $8,280,826  and  $6,423,984 at
December  31,  2003 and 2002,  respectively.  The fair  value of these  loans of
$8,159,401 and $6,030,669, respectively, was estimated based upon projected cash
flows discounted at the estimated  current interest rates at which similar loans
would be made. The applicable amount of the allowance for loan losses along with
accrued  interest and advances  related  thereto  should also be  considered  in
evaluating the fair value versus the carrying value.


10.    Non-cash Transactions

     During 2003,  the  Partnership  restructured  two loans that resulted in an
increase to loans  receivable of $107,198 and a decrease to accrued interest and
late fees and advances of $88,685 and $18,513, respectively.

     During 2002, the Partnership foreclosed on one property and transferred its
interest into a LLC (see Note 6), which  resulted in an increase in  investments
of $1,096,368 and a decrease in loans receivable,  accrued interest and advances
of $954,488, $88,913 and $52,967, respectively.

     During 2002, the  Partnership  restructured  four loans that resulted in an
increase to loans  receivable  and the allowance for loan losses of $420,969 and
$47,489,  respectively,  and a decrease  to accrued  interest  and  advances  of
$345,796 and $27,684, respectively.

     During 2002, the Partnership  originated two unsecured non-interest bearing
loans,  which  resulted in an increase to  unsecured  loans of $238,738  and the
allowance for loan losses of $88,331.  The Partnership imputed interest on these
loans at 10.5% per annum, which resulted in a decrease to unsecured loans and an
increase to discount on loans of $150,407.

                                       33
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


11.    Asset Concentrations and Characteristics

     Most loans are secured by recorded deeds of trust. At December 31, 2003 and
2002,  there were 23 and 25 secured loans  outstanding,  respectively,  with the
following characteristics:
<TABLE>
<S>    <C>                                                                      <C>                 <C>
                                                                                2003                2002
                                                                            -------------       -------------

       Number of secured loans outstanding                                             23                  25
       Total secured loans outstanding                                        $ 8,280,826         $ 6,423,984

       Average secured loan outstanding                                       $   360,036         $   256,959
       Average secured loan as percent of total                                     4.35%               4.00%
       Average secured loan as percent of Partners' capital                         3.99%               2.84%

       Largest secured loan outstanding                                       $ 1,000,000         $ 1,000,000
       Largest secured loan as percent of total                                    12.08%              15.57%
       Largest secured loan as percent of Partners' capital                        11.08%              11.05%
       Number of counties where security is located (all California)                    8                  11

       Largest percentage of loans in one county                                   44.11%              41.38%
       Average secured loan to appraised value of security based on
           appraisals and prior liens at date of loan                              60.79%              65.86%

       Number of secured loans in foreclosure                                           0                   2
       Amount of secured loans in foreclosure                                 $         0         $   236,807
</TABLE>

       The following categories of secured loans were held at December 31, 2003
and 2002:
<TABLE>
<S>    <C>                                                                      <C>                  <C>
                                                                                2003                 2002
                                                                            -------------       -------------

       First trust deeds                                                      $ 3,733,346         $ 3,269,897
       Second trust deeds                                                       3,872,480           2,939,753
       Third trust deeds                                                          675,000             214,334
                                                                            -------------       -------------
              Total loans                                                       8,280,826           6,423,984
       Prior liens due other lenders at time of loan                            4,319,281           5,475,725
                                                                            -------------       -------------

              Total debt                                                      $12,600,107         $11,899,709
                                                                            =============       =============

       Appraised property value at time of loan                               $20,728,514         $18,069,602

       Total loans as percent of appraisals based on appraisals
         and prior liens at date of loan                                           60.79%              65.86%

       Loans by type of property
           Owner occupied homes                                               $   853,869         $ 1,037,474
           Non-owner occupied homes                                             1,589,092             575,051
           Apartments                                                           1,367,327             708,648
           Commercial                                                           2,410,861           2,045,811
           Land                                                                 2,059,677           2,057,000
                                                                            -------------       -------------

                                                                              $ 8,280,826         $ 6,423,984
                                                                            =============       =============
</TABLE>

                                       34
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


11.    Asset Concentrations and Characteristics (continued)

     Scheduled  maturity  dates of secured  loans as of December 31, 2003 are as
follows:

                  Year Ending December 31,
                            2004                              $ 2,334,650
                            2005                                2,622,109
                            2006                                  809,894
                            2007                                1,521,152
                            2008                                  199,415
                         Thereafter                               793,606
                                                             ------------

                            Total                             $ 8,280,826
                                                             ============

     The scheduled maturities for 2004 above include approximately $2,207,200 in
7 loans, which are past maturity at December 31, 2003. Interest payments on four
of  these  loans  with  an  aggregate   principal  balance  of  $1,985,357  were
categorized  as delinquent  over 90 days and are included in total loans 90 days
or more delinquent presented in Note 2.

     Cash  deposits per bank at December 31, 2003 of $457,204  were in one bank.
The balance  exceeded  federal  insurance  limits (up to  $100,000  per bank) by
$357,204. The Partnership's main bank is the same financial institution that has
provided the Partnership with the $3,500,000 limit line of credit.

     The Partnership had a substantial amount of its loan receivable balance due
from one borrower in 2003 and 2002.  This borrower  accounted for  approximately
15% and 22% of the loan  balance at December  31,  2003 and 2002,  respectively.
This borrower accounted for approximately 12%, 7% and 0% of interest revenue for
the years ended December 31, 2003, 2002 and 2001.


12.    Commitments and Contingencies

       Workout agreements

     The Partnership has negotiated various  contractual workout agreements with
borrowers  whose  loans  are  past  maturity  or who are  delinquent  in  making
payments.  The  Partnership  is not  obligated  to fund  additional  money as of
December 31, 2003. As of December 31, 2003 the  Partnership  had two loans under
workout agreements totaling $64,936.

       Construction loans

     The Partnership has  construction  loans on projects,  which are at various
stages of  completion  of the  construction  process at December 31,  2003.  The
Partnership  has approved the borrowers up to a maximum loan  balance;  however,
disbursements  are made during  completion  phases  throughout the  construction
process. At December 31, 2003, there were $75,255 of undistributed  construction
loans which will be funded by a  combination  of retained  investors'  earnings,
line of credit draw-downs and retirement of principal on current loans.

       Legal proceedings

     The  Partnership is involved in various legal actions arising in the normal
course of business.  In the opinion of management,  such matters will not have a
material effect upon the financial position of the Partnership.

                                       35
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                          NOTES TO FINANCIAL STATEMENTS
                        DECEMBER 31, 2003, 2002 AND 2001


13.   Selected Financial Information (Unaudited)
<TABLE>
<S>                                              <C>             <C>            <C>             <C>            <C>
                                                                  Calendar Quarter
                                              ----------------------------------------------------------

                                                 First           Second         Third           Fourth         Annual
                                              -----------     -----------    -----------     -----------    -------------
Revenues
     2003                                       $ 173,306       $ 187,186      $ 192,171       $ 229,617      $  782,280
     2002                                       $ 312,044       $ 278,648      $ 260,548       $ 226,946      $1,078,186
     2001                                       $ 349,061       $ 291,342      $ 261,312       $ 290,666      $1,192,381

Expenses
     2003                                       $  29,061       $  21,330      $  50,959       $  88,289      $  189,639
     2002                                       $ 115,413       $  81,173      $  69,770       $  48,348      $  314,704
     2001                                       $ 137,576       $  84,453      $  58,231       $  90,924      $  371,184

Net income allocated to general partners
     2003                                       $   1,442       $   1,659      $   1,412       $   1,413      $    5,926
     2002                                       $   1,966       $   1,975      $   1,908       $   1,786      $    7,635
     2001                                       $   2,115       $   2,069      $   2,031       $   1,997      $    8,212

Net income allocated to limited partners
     2003                                       $ 142,803       $ 164,197      $ 139,800       $ 139,915      $  586,715
     2002                                       $ 194,665       $ 195,500      $ 188,870       $ 176,812      $  755,847
     2001                                       $ 209,370       $ 204,820      $ 201,050       $ 197,745      $  812,985

Net income per $1,000 invested
  where income is reinvested
     2003                                       $      16       $      16      $      16       $      19      $       67
     2002                                       $      21       $      21      $      21       $      22      $       85
     2001                                       $      21       $      21      $      21       $      22      $       85

where income is withdrawn
     2003                                       $      16       $      16      $      16       $      17      $       65
     2002                                       $      21       $      21      $      21       $      19      $       82
     2001                                       $      20       $      21      $      21       $      20      $       82
</TABLE>


                                       36
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                  SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
                                December 31, 2003
<TABLE>
<S>             <C>                          <C>                <C>                 <C>             <C>              <C>
                                                                Col. C - Additions
                                             Col B.      -------------------------------------
                                           Balance at           (1)                 (2)                              Col E.
                Col A.                     Beginning      Charged to Costs       Charged to         Col. D         Balance at
              Description                  of Period        And Expenses       Other Accounts     Deductions      End of Period
---------------------------------------   ------------   ------------------   ----------------   -------------   ---------------
                                                                                                      (a)
Year Ended December 31, 2003

   Deducted from asset accounts

   Allowance for doubtful accounts         $   791,882      $      (68,382)       $          -     $  (43,031)      $    680,469

   Cumulative write-down of
     real estate held for sale (REO)           580,086               50,083                  -               -           630,169
                                          ------------   ------------------   ----------------   -------------   ---------------

                                           $ 1,371,968      $      (18,299)       $          -     $  (43,031)      $  1,310,638
                                          ============   ==================   ================   =============   ===============
</TABLE>


(a) Represents write-offs on loans.



                                       37
<PAGE>

                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                                   SCHEDULE IV
                          MORTGAGE LOANS ON REAL ESTATE
                         RULE 12-29 LOANS ON REAL ESTATE
                                DECEMBER 31, 2003


<TABLE>
<S>          <C>      <C>         <C>         <C>          <C>           <C>         <C>        <C>        <C>
             Col. B   Col. C      Col. D      Col. E       Col. F        Col. G      Col. H     Col. I     Col. J
  Col. A   Interest   Final       Period       Prior     Face Amount  Carry Amount Principal Amt Type    Geographic
 Descript    Rate    Maturity    Payment       Liens       Mortgage     Mortgage    Delinquent   Lien      Location
----------------------------------------------------------------------------------------------------------------------

Apts.        6.50%   05/01/06    $    541  $   89,904    $   75,000    $  96,716    $   96,716    2nd    Sacramento
Apts.        7.00%   02/10/05         234      80,250        40,125       40,125             -    2nd    San Francisco
Comm.        9.00%   05/10/02         671           -        83,333       77,472        77,472    1st    Shasta
Comm.        7.00%   07/01/02       1,131           -       146,667      132,568       132,568    1st    Contra Costa
Land        11.00%   01/01/01       9,167     201,686     1,000,000      773,510       773,510    2nd    Stanislaus
Land        11.00%   07/01/01       9,167     137,737     1,000,000      975,793       975,793    2nd    Stanislaus
Land        11.00%   11/01/00           -           -        85,366            -             -    3rd    Stanislaus
Land        11.50%   07/01/01       1,753   1,000,000       182,927      182,927       182,927    2nd    Stanislaus
Apts.       12.00%   07/01/06       5,755           -       720,000      713,178             -    1st    San Francisco
Comm.       10.00%   12/01/03         471           -        53,636       53,229        53,229    1st    Stanislaus
Comm.       10.00%   12/01/01         105      82,723        11,919       11,702        11,702    2nd    Stanislaus
Comm.       10.00%   07/01/11       1,995           -       219,538      214,135             -    1st    Santa Clara
Land         8.00%   12/01/04         900           -       135,000      127,448             -    1st    Sacramento
Comm.        7.50%   02/28/07       3,206           -       513,000      560,354             -    1st    Santa Clara
Comm.        7.50%   02/28/07       4,290           -       686,400      686,400             -    1st    Alameda
Res.         6.13%   08/01/32       1,823           -       300,000      294,469             -    1st    San Mateo
Res.        11.00%   09/01/07       2,619     415,386       275,000      274,398       274,398    2nd    San Mateo
Apts.       10.00%   10/14/05       7,121     610,555       900,000      417,733             -    2nd    Alameda
Apts.       10.50%   06/01/08         944     389,330       100,000       99,576             -    2nd    Alameda
Res.        10.50%   07/01/08         915           -       100,000       99,839             -    1st    San Francisco
Res.         8.75%   09/01/05       4,396           -       900,000      489,254             -    1st    Alameda
Res.         8.75%   01/01/09       2,242           -       285,000      285,000             -    1st    Alameda
Comm.        9.50%   01/01/05       5,344     463,805       675,000      675,000             -    3rd    Alameda
Res.        10.00%   12/25/05       8,333     847,905     1,000,000    1,000,000             -    2nd    Alameda
                                --------------------------------------------------------------

Total                            $ 73,123  $4,319,281    $9,487,911   $8,280,826    $2,578,315
                                ==============================================================
</TABLE>


                                       38
<PAGE>



                         REDWOOD MORTGAGE INVESTORS VII
                       (A California Limited Partnership)
                             SCHEDULE IV (continued)
                         MORTGAGGE LOANS ON REAL ESTATE
                         RULE 12-29 LOANS ON REAL ESTATE
                                DECEMBER 31, 2003


     Reconciliation  of  carrying  amount  (cost) of  secured  loans at close of
periods
<TABLE>
<S>                                                             <C>              <C>              <C>
                                                                          Year ended December 31,
                                                           ------------------------------------------------

                                                                2003             2002             2001
                                                           --------------   --------------   --------------

Balance at beginning of year                                 $  6,423,984     $ 10,091,195     $ 12,794,297
                                                           --------------   --------------   --------------
Additions during period
   New loans                                                    4,349,527        1,447,329        3,066,276
   Other                                                          107,198          420,969          354,197
                                                           --------------   --------------   --------------
     Total additions                                            4,456,725        1,868,298        3,420,473
                                                           --------------   --------------   --------------

Deductions during period
   Collections of principal                                     2,556,852        4,569,574        6,123,575
   Foreclosures                                                         -          954,488                -
   Cost of loans sold                                                   -                -                -
   Amortization of premium                                              -                -                -
   Other                                                           43,031           11,447                -
                                                           --------------   --------------   --------------
     Total deductions                                           2,599,883        5,535,509        6,123,575
                                                           --------------   --------------   --------------

Balance at close of year                                     $  8,280,826     $  6,423,984     $ 10,091,195
                                                           ==============   ==============   ==============
</TABLE>





                                       39
<PAGE>

     Item 9 - Changes in and  Disagreements  with  Accountants on Accounting and
Financial Disclosure

     There  were no  disagreements  with the  Partnership's  independent  public
accountants during the years ended December 31, 2003 and 2002.


Item 9a. - Controls and Procedures

     The Partnership  carried out an evaluation,  under the supervision and with
the participation of the general partners of the effectiveness of the design and
operation of the Partnership's  disclosure controls and procedures as of the end
of the period covered by this report pursuant to the Securities and Exchange Act
of 1934.  Based upon that evaluation,  the general  partners  concluded that the
Partnership's disclosure controls and procedures were effective.

     There were no significant  changes in the  Partnership's  internal  control
over  financial  reporting  during the  Partnership's  fourth fiscal quarter and
through the date of this report that have materially affected,  or are likely to
materially affect, the Partnership's internal control over financial reporting.


                                    Part III


Item 10 - Directors and Executive Officers of the Registrant

     The Partnership has no Officers or Directors. Rather, the activities of the
Partnership  are  managed  by  the  two  general  partners,  one of  whom  is an
individual, Michael R. Burwell. The second general partner is Gymno Corporation,
a  California  corporation,  formed  in  1986.  Mr.  Burwell  is one of the  two
shareholders  of Gymno  Corporation,  a  California  corporation,  and has a 50%
interest in the corporation.

The General Partners.

     Michael R.  Burwell.  Michael R. Burwell,  age 46,  General  Partner,  past
member  of  Board  of  Trustees  and  Treasurer,   Mortgage  Brokers   Institute
(1984-1986);  President,  Director,  Chief Financial  Officer,  Redwood Mortgage
Corp.  (1979-present);  Director,  Secretary  and  Treasurer  A  &  B  Financial
Services, Inc. (1980-present);  President, Director, Chief Financial Officer and
Secretary (since 1986) of Gymno Corporation;  President, Director, Secretary and
Treasurer of The Redwood Group, Ltd. (1979-present).  Mr. Burwell is licensed as
a real estate sales person.

     Gymno  Corporation.  Gymno  Corporation,  General Partner,  is a California
corporation  formed in 1986 for the  purpose  of acting as a general  partner of
this  partnership  and of other limited  partnerships  formed by the  individual
general partners. The shares in Gymno Corporation are held equally by Michael R.
Burwell  and the  estate  of D.  Russell  Burwell.  Upon the  completion  of the
administration of D. Russell  Burwell's  estate,  Michael R. Burwell will have a
controlling  interest in Gymno Corporation.  Michael R. Burwell is a director of
Gymno and the director  position held by D. Russell Burwell is currently vacant.
Michael R. Burwell is its President, Chief Financial Officer and Secretary.

Financial Oversight by General Partners.

     The Partnership  does not have a board of directors or an audit  committee.
Accordingly,  the general  partners  serve the  equivalent  function of an audit
committee  for,  among  other  things,  the  following  purposes:   appointment,
compensation,  review  and  oversight  of the  work  of our  independent  public
accountants,  and  establishing  the  enforcing of the Code of Ethics.  However,
since the Partnership  does not have an audit committee and the general partners
are not independent of the Partnership,  the Partnership does not have an "audit
committee financial expert."

                                       40
<PAGE>

Code of Ethics.

     The  general  partners  have  adopted  a Code of Ethics  applicable  to the
general partners and to any agents, employees or independent contractors engaged
by the  general  partners  to perform the  functions  of a  principal  financial
officer, principal accounting officer or controller of the Partnership,  if any.
You may obtain a copy of this Code of Ethics,  without  charge,  upon request by
calling our Investor Services Department at (650) 365-5341.


Item 11 - Executive Compensation

       COMPENSATION OF THE GENERAL PARTNERS AND AFFILIATES BY PARTNERSHIP

     As  indicated  above  in  Item  10,  the  Partnership  has no  Officers  or
Directors. The Partnership is managed by the general partners. There are certain
fees and other items paid to management and related parties.

     A more  complete  description  of management  compensation  is found in the
Prospectus, pages 12-13, under the section "Compensation of the General Partners
and the Affiliates",  which is incorporated by reference.  Such  compensation is
summarized below.

     The  following  compensation  has been  paid to the  general  partners  and
affiliates  for services  rendered  during the year ended December 31, 2003. All
such compensation is in compliance with the guidelines and limitations set forth
in the Prospectus.
<TABLE>
<S>                                   <C>                                                           <C>
Entity Receiving Compensation         Description of Compensation and Services Rendered             Amount
----------------------------------------------------------------------------------------------------------
I.  Redwood Mortgage Corp.            Mortgage Servicing Fee for servicing loans...................$73,062

General Partners &/or Affiliates      Asset Management Fee for managing assets.....................$34,011

General Partners                      1% interest in profits........................................$5,926
</TABLE>


     II. FEES PAID BY BORROWERS ON MORTGAGE LOANS PLACED WITH THE PARTNERSHIP BY
COMPANIES  RELATED TO THE GENERAL  PARTNERS  (EXPENSES OF  BORROWERS  NOT OF THE
PARTNERSHIP)
<TABLE>
<S>                                   <C>                                                         <C>
Redwood Mortgage Corp.                Mortgage Brokerage Commissions for services in
                                      connection with the review, selection, evaluation,
                                      negotiation, and extension of the loans paid by
                                      the borrowers and not by the Partnership....................$111,927

Redwood Mortgage Corp.                Processing and Escrow Fees for services in
                                      connection with fees notary, document preparation,
                                      credit investigation, and escrow payable by the
                                      borrowers and not by the Partnership..........................$3,296

Gymno Corporation                     Reconveyance Fee................................................$877
</TABLE>

     III. IN ADDITION, THE GENERAL PARTNERS AND/OR RELATED COMPANIES PAY CERTAIN
EXPENSES ON BEHALF OF THE PARTNERSHIP FOR WHICH IT IS REIMBURSED AS NOTED IN THE
STATEMENT  OF INCOME . . . . . . . . . . . . . . . . . . . . . . . . . . $23,014


                                       41
<PAGE>

Item 12 - Security Ownership of Certain Beneficial Owners and Management

     The general partners are to own an aggregate total of 1% of the Partnership
including a 1% portion of income and losses.


Item 13 - Certain Relationships and Related Transactions

     Refer to footnotes 3 and 4 of the Notes to Financial  Statements in Part II
item 8, which describes related party fees and data.

     Also refer to the Prospectus dated October 20, 1989 (incorporated herein by
reference) on page 12 "Compensation of General Partners and Affiliates" and page
14 "Conflicts of Interest".


Item 14 - Principal Accountant Fees and Services

     Fees for services performed for the Partnership by the principal accountant
for 2003 and 2002 are as follows:

     Audit Fees The aggregate  fees billed  during the years ended  December 31,
2003  and  2002  for  professional  services  rendered  for  the  audit  of  the
Partnership's  annual financial  statements included in the Partnership's Annual
Report  on  Form  10-K  and  review  of  financial  statements  included  in the
Partnership's   Quarterly  Reports  on  Form  10-Q  were  $37,513  and  $35,427,
respectively.

     Audit  Related  Fees  There  were no fees  billed  during  the years  ended
December 31, 2003 and 2002 for audit-related services.

     Tax fees The  aggregate  fees billed for tax  services  for the years ended
December  31, 2003 and 2002,  were $3,495 and $3,036,  respectively.  These fees
relate to professional services rendered primarily for tax compliance.

     All Other  Fees  There were no other  fees  billed  during the years  ended
December 31, 2003 and 2002.

     All audit and non-audit  services are approved by the general partner prior
to the accountant being engaged by the Partnership.


                                       42
<PAGE>


                                     Part IV


Item 15 - Exhibits, Financial Statements and Schedules, and Reports on Form 8-K

A.  Documents filed as part of this report are incorporated:

    1. In Part II, Item 8 under A - Financial Statements.

    2. The Financial Statement Schedules are listed in Part II - Item 8
       under B - Financial Statement Schedules.

    3. Exhibits.

   Exhibit No.       Description of Exhibits
----------------   -------------------------------------------------------------

    3.1            Limited Partnership Agreement
    3.2            Form of Certificate of Limited Partnership Interest
    3.3            Certificate of Limited Partnership
    10.1           Escrow Agreement
    10.2           Servicing Agreement
    10.3       (a) Form of Note secured by Deed of Trust which provides for
                   principal and interest payments.
               (b) Form of Note secured by Deed of Trust which provides
                   principal and interest payments and right of assumption
               (c) Form of Note secured by Deed of Trust which provides for
                   interest only payments (d)Form of Note
    10.4       (a) Deed of Trust and Assignment of Rents to accompany Exhibits
                   10.3  (a), and (c)
               (b) Deed of Trust and Assignment of Rents to accompany Exhibit
                   10.3 (b)
               (c) Deed of Trust to accompany Exhibit 10.3 (d)
    10.5           Promissory Note for Formation Loan
    10.6           Agreement to Seek a Lender

     All of these exhibits were previously filed as the exhibits to Registrant's
Statement on Form S-11  (Registration No. 33-30427 and incorporated by reference
herein).

B.   Reports of Form 8-K.

     No reports on Form 8-K have been filed during the last quarter of the
     period covered by this report.

C.   See A (3) above.

D.   See A (2) above. Additional reference is made to the prospectus (S-11
     filed as part of the Registration statement) dated October 20, 1989 to
     pages 65 through 67 and Supplement #5 dated February 14, 1992 for
     financial data related to Gymno Corporation, a general partner.


                                       43
<PAGE>


                                   SIGNATURES

Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934 the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereto duly authorized on the 30th day of March
2004.

REDWOOD MORTGAGE INVESTORS VII

By: /S/ Michael R. Burwell
    -----------------------------------
    Michael R. Burwell, General Partner


By: Gymno Corporation, General Partner

    By: /S/ Michael R. Burwell
        ----------------------------------------
        Michael R. Burwell, President, Secretary
         & Chief Financial Officer


     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report has been signed below by the following person on behalf of the registrant
and in the capacity indicated on the 30th day of March 2004.

        Signature                      Title                           Date


/S/ Michael R. Burwell
------------------------
Michael R. Burwell                 General Partner               March 30, 2004


/S/ Michael R. Burwell
------------------------
Michael R. Burwell           President, Secretary & Chief        March 30, 2004
                              Financial Officer of Gymno
                           Corporation (Principal Financial
                                and Accounting Officer);
                              Director of Gymno Corporation





                                       44
<PAGE>

                                                                    Exhibit 99.1

                          GENERAL PARTNER CERTIFICATION


     I, Michael R. Burwell, General Partner of the Partnership, certify that:

     1. I have  reviewed  this  annual  report on Form 10-K of Redwood  Mortgage
Investors VII, a California Limited Partnership (the "Registrant");

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

     4. The  Registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
material  information  relating to the  Registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of December 31, 2003 (the "Evaluation Date"); and

     (c) presented in this annual report our conclusions about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date.

     5. The Registrant's other certifying  officers and I have disclosed,  based
on our most  recent  evaluation,  to the  Registrant's  auditors  and the  audit
committee  of  Registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

     (a) all  significant  deficiencies  in the design or  operation of internal
controls  which  could  adversely  affect  the  Registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
Registrant's auditors any material weaknesses in internal controls; and

     (b) any fraud,  whether or not material,  that involves management or other
employees who have a significant role in the Registrant's internal controls.

     6. The Registrant's other certifying  officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



/s/ Michael R. Burwell
-----------------------------------
Michael R. Burwell, General Partner
March 30, 2004


                                       45
<PAGE>
                                                                    Exhibit 99.1

                            CERTIFICATION PURSUANT TO
                             18 U.S.C SECTION 1350,
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 2003 as filed with
the  Securities  and  Exchange  Commission  on the date hereof  (the  "Report"),
pursuant  to 18  U.S.C.  (S)  1350,  as  adopted  pursuant  to  (S)  906  of the
Sarbanes-Oxley  Act of 2002,  I,  Michael  R.  Burwell,  General  Partner of the
Partnership, certify, that to the best of my knowledge:

     (1) The Report fully  complies  with the  requirements  of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Partnership.


/s/ Michael R. Burwell
-----------------------------------
Michael R. Burwell, General Partner
March 30, 2004



                                       46
<PAGE>
                                                                    Exhibit 99.2

               PRESIDENT AND CHIEF FINANCIAL OFFICER CERTIFICATION

     I,  Michael R.  Burwell,  President  and Chief  Financial  Officer of Gymno
Corporation, General Partner of the Partnership, certify that:

     1. I have  reviewed  this  annual  report on Form 10-K of Redwood  Mortgage
Investors VII, a California Limited Partnership (the "Registrant");

     2. Based on my  knowledge,  this annual  report does not contain any untrue
statement of a material fact or omit to state a material fact  necessary to make
the statements made, in light of the  circumstances  under which such statements
were made,  not  misleading  with  respect to the period  covered by this annual
report;

     3. Based on my knowledge,  the financial  statements,  and other  financial
information  included  in this annual  report,  fairly  present in all  material
respects the financial  condition,  results of operations  and cash flows of the
Registrant as of, and for, the periods presented in this annual report;

     4. The  Registrant's  other  certifying  officers and I are responsible for
establishing and maintaining  disclosure  controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the Registrant and we have:

     (a)  designed  such  disclosure  controls  and  procedures  to ensure  that
material  information  relating to the  Registrant,  including its  consolidated
subsidiaries, is made known to us by others within those entities,  particularly
during the period in which this annual report is being prepared;

     (b) evaluated the effectiveness of the Registrant's disclosure controls and
procedures as of December 31, 2003(the "Evaluation Date"); and

     (c) presented in this annual report our conclusions about the effectiveness
of the  disclosure  controls and  procedures  based on our  evaluation as of the
Evaluation Date.

     5. The Registrant's other certifying  officers and I have disclosed,  based
on our most  recent  evaluation,  to the  Registrant's  auditors  and the  audit
committee  of  Registrant's  board  of  directors  (or  persons  performing  the
equivalent function):

     (a) all  significant  deficiencies  in the design or  operation of internal
controls  which  could  adversely  affect  the  Registrant's  ability to record,
process,  summarize  and  report  financial  data  and have  identified  for the
Registrant's auditors any material weaknesses in internal controls; and

     (b) any fraud,  whether or not material,  that involves management or other
employees who have a significant role in the Registrant's internal controls.

     6. The Registrant's other certifying  officers and I have indicated in this
annual report whether or not there were significant changes in internal controls
or in other factors that could significantly affect internal controls subsequent
to the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.



/s/ Michael R. Burwell
---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2004


                                       47
<PAGE>

                                                                    Exhibit 99.2


                            CERTIFICATION PURSUANT TO
                             18 U.S.C. SECTION 1350
                             AS ADOPTED PURSUANT TO
                  SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002


     In connection with the Annual Report of Redwood Mortgage Investors VII (the
"Partnership") on Form 10-K for the period ended December 31, 2003 as filed with
the  Securities  and  Exchange  Commission  on the date hereof  (the  "Report"),
pursuant  to 18  U.S.C.  (S)  1350,  as  adopted  pursuant  to  (S)  906  of the
Sarbanes-Oxley Act of 2002, I, Michael R. Burwell, President and Chief Financial
Officer of Gymno Corporation,  General Partner of the Partnership,  certify that
to the best of my knowledge:

     (1) The Report fully  complies  with the  requirements  of section 13(a) or
15(d) of the Securities Exchange Act of 1934; and

     (2)  The  information  contained  in the  Report  fairly  presents,  in all
material  respects,  the  financial  condition  and results of operations of the
Partnership.


/s/ Michael R. Burwell
---------------------------------
Michael R. Burwell, President and
Chief Financial Officer of Gymno
Corporation, General Partner
March 30, 2004


                                       48